Investing from the Netherlands

In past years, a few good options have been developed for index investing from the Netherlands.

General approach
In the Netherlands, an investor is currently able to buy index funds in the form of exchange-traded funds (ETFs) through a bank or broker and there are some companies offering index mutual funds. Since the local AEX (Amsterdam Exchange Index) consists of just 25 large Dutch companies with Unilever, Shell and ING taking up 42% of market cap, it might be wise for diversification purposes to look across the borders for global diversification.

The underperformance of active funds is present in all markets globally, as is true in The Netherlands. The SPIVA scorecards, comparing active funds to their benchmarks, have come up with as much as 100% of active funds underperforming their benchmarks over the five years up until 2015 and 96.77% over the last ten years up until 2015.

Taxation
Net wealth (assets-liabilities) is taxed at a fixed 1.2% rate, called the ‘vermogensrendementsheffing’. For 2015, the tax-free allowance is set at €21,330 for an individual and €42,660 for a fiscal couple. The withholding tax rate on distributed dividends is 15%, but is reclaimable when doing your income taxes in the following year; it is meant as an advance levy for the 1.2% wealth tax.

You should check the Dutch tax treaties with the respective countries if you would like to buy investments not domiciled in the Netherlands. The withholding tax rate on dividends from US domiciled ETFs (regardless the source of dividends) is reduced to 15% if you fill in a W-8BEN form, which you would often do when opening an account at a broker. You can then get the 15% in taxes withheld by the US government back by deducting them from the net wealth tax in box 3. Dividends from Irish domiciled ETFs are not taxed by the Irish government. Dividends from Dutch funds are subject to 15% Dutch withholding tax, which you can reclaim at your income taxes even if you do not pay net wealth tax. The wait of approximately 6-18 months before receiving the withheld taxes back can be a reason to choose accumulating funds.

In addition to personal taxation on dividends, the fund can also be taxed internally on the dividends received, which is before they distribute or reinvest the dividends. An advantage of funds domiciled in the Netherlands, is that they are sometimes, due to their structure, able to avoid international withholding tax leakage. This wiki page shows calculations for ETFs domiciled in Ireland and the US and what effect withholding taxes have on your yearly costs. With respect to taxation it would make sense to prefer a US domiciled fund for US assets over an Ireland domiciled fund since a Dutch investor can receive 100% of the US dividends for a US domiciled fund, but the Irish fund cannot receive the full 100% of US dividends.

Domicile of funds
US domiciled funds are often better diversified, have lower trading costs and lower expense ratios. Taking withholding taxes into account, a US ETF holding US stocks is more attractive than its Ireland domiciled counterpart. The reason that international investors are often not advised to buy US domiciled assets is because of estate taxes, FATCA (Foreign Account Tax Compliance Act) and because their country does not have a withholding tax treaty (see also Nonresident alien taxation).

The Netherlands is one of the few countries that has both an estate tax treaty and a withholding tax treaty with the US, and an active FATCA agreement. The NRA’s wiki page compares Vanguard’s VT (US domiciled) with VWRL (Ireland domiciled). Since in the end for a Dutch investor the Level 2 withholding taxes do not differ, the conclusions can be made from Level 1 withholding taxes, which are paid by the fund internally and are non-reclaimable. With VT, this is about 3% withholding tax times the dividend yield, while with VWRL it is about 10% withholding tax times the dividend yield. When including the TER (Total Expense Ratio) and a 2% dividend yield estimation, VWRL has yearly costs of 0.43% while VT has a yearly cost of 0.23%. To put this in perspective, with an investment in either fund held for 25 years with an annual return of six percent, VT has lost % due to costs, while VWRL has lost about % due to costs.

It is clear that a US domiciled ETF investing in a total world index or a US stock index is preferable over its Ireland domiciled counterpart in terms of withholding tax leakage, but it may be beneficial to hold ex-US stocks in an Ireland domiciled ETF. For European stocks, table 6 shows a 10-year average foreign tax cost of 0.21% at an average dividend yield of 3.38%, which results in a 6.2% withholding leakage for Vanguard's US domiciled ETF VGK. Its Ireland domiciled counterpart VEUR has only had one full fiscal year yet and was at (98,042/1,768,698)x100=5.54% withholding tax leakage calculated from the annual reports (VGK leaked around 5% in 2013-2014).

There is not enough data to make a decent comparison, but there seems to be no clear advantage in domicile for European stocks.

For emerging markets stocks, Table 8 shows a 10-year average foreign tax cost of 0.28% at an average dividend yield of 2.33%, which leads to a withholding tax leakage of 12.01% for Vanguard's US domiciled ETF VWO. Its Ireland domiciled counterpart VFEM has had two full fiscal years and averaged (298,586/3,325,881)x100=8.98% in the fiscal year ending in 2014 and (100,965/1,027,318)x100=9.83% in the fiscal year ending in 2013. In 2013 and 2014 VWO had a withholding tax leakage of about 11%.

For emerging markets and with this limited data, the Ireland domiciled ETF seems to have an advantage of 1.5% times the dividend yield. But because VWO is 10 basis points cheaper in its expense ratio than VFEM, the fund is still seven basis points cheaper at a two percent dividend yield.

But then what about Dutch domiciled equity funds that suffer no foreign withholding taxes? Companies offering these types of funds are Meesman and ThinkETFs. The first offers a MSCI World fund with a yearly cost of 0.50%, which is slightly higher than the yearly costs we expect for VWRL including tax leakage. Meesman is a good option for investors who do not suffer box 3 withholding taxes and thus cannot reclaim US withholding tax, which is typically if your net wealth is below 30,000 euros. ThinkETFs offers a global equity ETF that is equally weighted and holds 250 stocks, compared to around 7,000 stocks with VT.

Whether the Dutch funds are already a good competitor to the US alternatives is questionable. For non-US stocks these providers might be more interesting, but the question remains whether it is worth increasing expense ratios and lowering diversification substantially for a small decrease in withholding taxes.

This KPMG file shows how a Luxembourg domiciled fund can profit from withholding tax treaties, which is barely. Ireland and US domiciled ETFs are often a better choice in case it holds its securities physically because these funds can access their country's tax treaties. Bonds are less frequently taxed by governments, which means for instance that an Ireland domiciled ETF investing in US government bonds does not have to suffer from US tax withholding.

Fixed income
At the current yields (at the start of 2015), CDs (deposito’s) are likely more interesting than the safe eurozone bonds. You can use etfinfo.com or justetf.com to find and compare funds domiciled in Europe. Dutch cash deposits are insured up until €100,000 per accountholder per bank. It is of course possible as well to buy bond funds or single Dutch government bonds through your broker or bank.

Fixed income is usually regarded as an option for reducing risk in an investment portfolio on the short term. Currency risk is a major driver of volatility for bonds, hedging currency risk can thus be beneficial for bonds. For a Dutch investor who earns and spends euro's this can be done by buying an eurozone bond fund or by buying a currency hedged fund.

Other considerations
You can easily compare brokers online using one of the comparison websites. Things to take into account are fixed, variable and currency transaction costs, custody charges (bewaarloon) and whether the broker can lend out your securities. A yearly research on brokerage tariffs can be found around March or April on VEB.net; 2014's version is found here.

The EU investing wiki page mentions useful aspects of funds to consider, such as; whether the fund distributes dividends, if it is synthetically or physically replicating and the distinction between base currency and trading currency.

Pensions and tax-advantaged accounts
Dutch pension funds are most often mandatory defined benefits plans. Tax-advantaged options are slim for Dutch that cannot access an employer plan in the second pillar and thus are limited to third pillar products. Individuals have a choice of two types of defined contribution accounts:


 * A 'lijfrenteverzekering' account
 * A 'banksparen' account

By saving in defined contribution accounts, investments would not be touched by the net wealth tax of 1.2%; and investments are income tax deductible. Taxes are paid in the distribution phase.

A downside is that you can only add to these kinds of accounts when you have a pension gap, which is only possible if you could not add enough to your mandatory second pillar pension fund (for instance, because you have worked part-time, were unemployed, self-employed or that your employer did not offer a pension plan). You can check if you have a pension gap on the site of the tax authority.

Another downside is that you cannot easily access the invested money until you are of retirement age (65-70 years of age). When you are of retirement age, you can only invest the money in an annuity (with 'lijfrente' until you pass away; with 'banksparen' the annuity has a specific duration). It is also important to check out what happens if you pass away: 'lijfrente' insurances usually leaves nothing to your heirs unless you insure against it; 'banksparen' does pay the amount out to your heirs. Current rates of 'banksparen' are close to regular savings rates and opening costs are expected to be at least €150 without advice (which is often recommended before purchasing these kinds of products).

Investing tax-advantaged is possible too through 'banksparen', but again only for the amount of your pension gap. With these accounts you lose flexibility, are burdened with high entry costs and annual costs exceeding 0.50% by far. The funds that fall under this category are often actively managed, deviating strongly from their benchmarks and drifting away from their policies (e.g. by putting too much in equities).

These tax-advantaged accounts are probably not a suitable option for Dutch Boglehead-style investors. Due to the pension gap limitation, it usually is only a small portion of your assets that you can invest tax-advantaged in these non-flexible accounts.

Books

 * J. Wintermans, De schitterende eenvoud van indexbeleggen (4th ed., 2010)
 * M. Kerdel and J. Schukken, De Beleggingsillusie (4th ed., 2015)