Anyone fancy doing a Key Post : How to invest in ETFs?

Discussion in 'Exchange Traded Funds (ETFs)' started by Brendan Burgess, Mar 7, 2017.

  1. Brendan Burgess

    Brendan Burgess Founder

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    I have recommended ETFs to some people, but I have no idea about the actual mechanics. Any volunteers to do a Key Post on the topic?

    The idea would be that someone who has decided to buy an ETF would be able to follow the instructions and would be made aware of some of the downsides. But without a repetition of the debates on other threads. Links would be provided to these debates.

    1) Buy a US domiciled ETF as it will be taxed like a share.

    2) Here are three examples of US Domicled ETFs


    3) How to buy them ....
    Open a stockbroker account....


    4) How to account for tax on them

    Things to watch out for

    Be careful if you hold more than $60,000 in US assets

    If you do not have taxable income, go for an ETF which is geared to high dividend paying companies e.g. ...


     
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  2. Donnie

    Donnie Registered User

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    I am new to investing and have recently opened an account with Degiro but am yet to make a transaction. I have a small pool of approx. €3,000 lump sum at the moment but might set up a standing orders of €100 each month into an investment perhaps. The aim is to make returns that would be better than any deposit account on offer at the moment. I wont need access to the cash and will be able to leave it as an investment for 3 - 5 years. My appetite for risk would be low - medium.

    I am thinking of diversifying so investing in various Blue Chip companies, US domiciled ETFs and maybe a few Irish and UK listed companies. I stress that I am only beginning to do research so nothing confirmed yet.

    However I came across this thread on US ETFs and it would be very useful so a beginner like me.

    Would anyone be able to expand a bit further on this US ETFs thread?

    Thanks all
     
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  3. Sarenco

    Sarenco Frequent Poster

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    An investment horizon of only 3-5 years is not really sufficient for an equity investment, particularly if you have a low risk appetite.

    Are you maxing out your pension contributions? That's a much more tax efficient way of investing in equities for the long term.

    Are you carrying any debt? Paying down debt will give you a guaranteed, tax-free return with zero investment expenses.
     
  4. Donnie

    Donnie Registered User

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    Maxing out my pension contributions at the mo and in addition my employer contributes a generous 15%.

    Only debt at the moment is a mortgage. 29 years remaining so still a long way to go.

    To be honest I was thinking of US ETFs and perhaps some equities and relatively low risk blue chips mainly because deposit rates are just so low at the moment.
     
  5. Sarenco

    Sarenco Frequent Poster

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    That really is a very generous employer contribution to your pension.

    Is your pension invested 100% in equities? It's important to consider all your accounts together.

    What rate are you paying on your mortgage? Unless it's a really cheap tracker you are almost certainly better off paying that down ahead of schedule.

    A US domiciled ETF is taxed like any other US stock. So, you will pay income tax on dividends at your marginal rate and CGT on any gains.
     
  6. Donnie

    Donnie Registered User

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    Yes the pension contributions are good. To be honest I am unsure of the allocations and how diversified the pension investments are.

    I am on a SVR mortgage of 3.1%. I switched provider about a year ago. I am currently paying an additional 8% each month on top of my monthly re-payments.

    I know the best thing in the long term is to be debt free and pay off the mortgage as soon as possible and pump as much money into paying it off. However realistically if I did that the best I could do would probably be to knock 4/5 years off the 29 year term.

    I was hoping to try to build up some cash reserves rather than using any savings account that are available as there isn't any value in keeping money on deposit anymore.
     
  7. Gordon Gekko

    Gordon Gekko Frequent Poster

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    Conventional wisdom is that one should build up a slush fund equal to approximately six months worth of living expenses and max out one's AVCs before looking at personally held investments. At your age, your pension should be 100% invested in equities.
     
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  8. Donnie

    Donnie Registered User

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    Thanks GG and Sarenco. Sound advice.

    I have €12k (I have already deducted the entry mgt fee) in a KBC Sivek Low investment fund. I only opened it at the end of Sept 16 at a price of 351.32 and the latest price if 366.82 so that low risk investment is going well so far. Redemptions require T-5 days notice I think so the cash is pretty much available if I ever needed to redeem some or all cash.

    I also have €14k just sitting in a deposit account with an Irish bank that is not really doing anything for me. Perhaps I should take 50% or more of this €14k and reduce my mortgage o/s balance.
     
  9. Sarenco

    Sarenco Frequent Poster

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    That's a very expensive fund and is subject to a 41% exit tax - best avoided.

    Once you have six months' expenses set aside in the best yielding deposit account you can find, I would apply any surplus cash against your mortgage balance. The return on paying down your mortgage will be equivalent to the weighted average interest rate over the remaining term of your loan. You won't do better then that on a risk-adjusted basis, particularly once you take investment costs and taxes for any alternative into account.

    As Gordon says, at your age your pension can be heavily invested in equities.
     
  10. Donnie

    Donnie Registered User

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    Im 35 but sounds like sticking to maxing out the pension and paying off the mortgage seems the best idea. There is still €349,000 o/s in the mortgage.

    Just in relation to your point on the KBC Sivek low fund, this has an annual mgt fee of 1.6% - 1.9% and then a 41% Irish exit tax on any gains I make. My thinking here though was this is still better than DIRT and leaving this sum on deposit. Not sure how this exit tax could be avoided unless I invested in an Irish product or as per my initial query on this thread by investing in a US domiciled ETF.
     
  11. username123

    username123 Frequent Poster

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    Jeez at 1.6% - 1.9% AMC, you'd be better off playing the lotto with the investment! Anything over 1% will decimate any investment gains over time, and adding in the 41% tax I doubt you'll do much better than deposit account.
     
  12. AJAM

    AJAM Registered User

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    Last edited: Aug 22, 2017
    If you are investing in stocks in general (or ETF's in particular), I would sum up the key rules as follows (in order of importance)

    Rule 1 - Hold a Diversified portfolio: Do this by buying broad based ETF's i.e. index trackers that track the S&P500, the EuroStoxx 600 etc.
    Why? Because there is lots of Nobel prize winning research that proves that you get the same return at lower risk (or higher return at the same risk) by using a diversified portfolio. You need at least 100 stocks to get the full benefit of diversification. Studies also show that >80% of active managers fail to consistently beat the market. So don't bother trying to pick individual stocks, just own all of them (i.e. the market)
    Rule 2 - Minimize Taxes : Do this by using US domiciled ETF's instead of Irish or EU ones. Also you should minimize dividends (assuming you are in the highest income tax bracket). So use VTI and IEUR and VWO as your US domiciled ETFs to track the US market the European market and emerging markets respectively.
    Why? Because Ireland has crazy rules that charge 41% Tax on Unit/Mutual funds and European domiciled ETF's, but charges 33% CGT on individual shares and US domiciled ETF's. Dividends are taxed as income at your marginal rate, so if you are in the highest Tax bracket you want to minimize these. (Note many EU domiciled ETF's automatically accumulate and reinvest the dividends specifically to get around the high taxes on Dividends, however this is no good to Irish investors because of the 41% tax mentioned above)
    Rule 3 - Minimize Transaction costs: Do this by using low cost brokers (e.g. Degiro.ie) and low cost ETF's (e.g. Vanguard & Ishares mgmt fee ~ 0.2%) instead of expensive Unit or Mutual funds (often fees of 1% p/a)
    Rule 4 - Take advantage of tax breaks: In Ireland you can claim 1,270 Euro of Capital gains Tax free each year. You can also offset capital gains with losses on other shares. So once a year you can sell off enough gains to give you a total gain of 1,270 tax free (You can buy them back again, to continue to hold them). This can be done as part of an annual re-balancing of your portfolio.
    Why? Say you hold an investment for 10 years. After 10 years it has a capital gain of 10,000. You sell and pay 3,333 in CGT Tax. Alternatively for each of those 10 years, you sell (and repurchase) 1270 of gains. At the end of the 10 years you still have a gain of 10,000 but no tax liability. Note this requires low transaction costs to be efficient e.g. Degiro.ie currently charge 0 on many ETF transactions.

    Here is how I would recommend you construct a portfolio
    1. Open an account with Degiro.ie - because they have by far the lowest transactions costs that I have seen
    2. Transfer money to the account
    3. Buy US domiciled ETF's: Below is a sample recommendation with rough % allocations

    30% IEUR - tracks the MSCI Europe 900 index - Fee 0.1%
    30% VTI - tracks the entire US market (3600 stocks) - Fee 0.04%
    10% VWO - tracks the FTSE Emerging Index (4654 stocks) - Fee 0.15%
    30% VEU - tracks the FTSE Developed ex U.S. All Cap Index(3600 stocks) - Fee 0.09% (Note will be some overlap with IEUR here)
    Recommend you do your own research on Morningstar.com
     
    Last edited: Aug 22, 2017
  13. fistophobia

    fistophobia Registered User

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    100% equity portfolio - no sane person would go for this.
    Jack Bogle - hold roughly your age in bonds.
     
  14. Gordon Gekko

    Gordon Gekko Frequent Poster

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    Quite the contrary...someone with a decent time horizon and the stomach for it should go as high up the risk curve as possible (i.e. 100% equities).
     
  15. locknbarrel

    locknbarrel New Member

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    Any opinions on hedging currency risk with US domiciled etfs?
     
  16. MrEarl

    MrEarl Frequent Poster

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    As Gordon quite rightly points out, age is a vital factor when making this decision.

    Over the long term, equities have proven to provide the best investment return.

    Other key factors to consider include:
    • ability to earn going forward (those who earn more through secure regular earnings, can risk more)
    • exposure to other categories of investments (a lot of people take on significant exposure to the Irish property sector when they buy a home)

    Bottom line - 100% equity investment is the correct decision for some people, but not for everyone.
     
  17. AJAM

    AJAM Registered User

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    Over a 20 year period, Bonds have never outperformed stocks. IMO if you are in your 20's or 30's you should have 0% bonds (unless you're super rich i.e. trying to protect rather than accumulate wealth).
    However above refers to the Equity portion of your portfolio. I purposely left out bonds for 2 reasons.
    1. How much you should have allocated to bonds is very much personal situation dependent. I'm in my mid 30's and have 0%.
    2. I think Bonds are a nightmare right now. Bonds have super low yields at the moment, and the US, UK and EU are all saying that in the medium to long term they will be raising interest rates (Bad for Bonds). Also as an Irish investor you'll be paying the 41% tax on any capital appreciation and/or Income tax on the dividends from any Irish/EU domiciled bond funds. You can use US domiciled Bond funds but these tend to be either US bonds or US$ hedged foreign bonds. The whole point of bonds is to reduce the risk of your portfolio. Holding US domiciled bonds introduces a large portion of currency risk for an Irish investor.

    The ideal solution is an accumulating Euro based (or euro hedged) Bond fund. These do exist, but for the moment Irish investors still have to pay the 41% tax on them. IMO, this (along with the Med/Long term interest rate outlook) makes bond funds extremely unattractive.

    At the moment, I use property funds (VNQ and VNQI) to diversify out my portfolio. They are not as good (in terms of diversification) as Bond funds would be, because they have approx. the same risk as stocks, however at least they are not particularly strongly correlated to stocks, so they do offer some diversification.

    Annualized Arithmetic Return, Risk(Annualized Std Dev) , Correlation (to S&P500) , Sharpe Ratio
    US Agg Bond : 7.58% , 5.38% , 0.21, 0.55
    S&P 500 : 11.93% , 14.91% , 1.00, 0.49
    Property REIT :14.51% , 16.94% , 0.57, 0.58
    World stocks : 10.19% , 14.61% , 0.88, 0.38
    London Gold : 7.34% , 19.33% , 0.01, 0.14
     
  18. Sarenco

    Sarenco Frequent Poster

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    That's actually not true.

    In every major developed market there have in fact been 20-year periods where domestic government bonds outperformed domestic equities. Long-term US Treasury Bonds actually outperformed the S&P500 (total return) over the 40-year period commencing April 1969!

    You are, of course, right to point out that bond yields are currently exceptionally low. However, global stocks are hardly cheap - by some measures US stocks are now at valuations last seen in 1929.

    Personally I think that somebody that is intending to retire at 65, could rationally have up to 100% of their pension fund invested in equities into their early 40s.

    For (long-term) after-tax savings, I think that 5-year State Savings Certificates represent good value in the current environment. No trading costs or taxes to worry about and a significant premium over the yield on 5-year Irish government bonds.

    Obviously paying down debt, where relevant, may provide an even higher tax-free return.
     
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  19. Gordon Gekko

    Gordon Gekko Frequent Poster

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    Last edited: Aug 23, 2017
    Sarenco,

    This may be worthy of its own thread, but you seem to be an advocate of derisking as one approaches retirement. Why is that? Is it the behavioural side of older investors? I've always fancied (personally) holding 100% equities forever (i.e. to the later of my death or my wife's death). The demise of annuity purchase obviously impacts on the necessity for "lifestyling".

    The equities will all be in pension/ARF vehicles.

    Thanks.

    Gordon
     
    Last edited: Aug 23, 2017
  20. Sarenco

    Sarenco Frequent Poster

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    In part Gordon. But mainly it's about trying to mitigate (or at least manage) sequence of returns risk.

    We actually previously discussed the point on this thread - https://www.askaboutmoney.com/threads/retirement-plan-average-return.201074/

    And the BlackRock note posted on this thread may help to illustrate the point in greater detail - https://www.askaboutmoney.com/threads/new-sunday-times-feature-diary-of-a-private-investor.195710/page-4.

    Of course, if you (or your heirs) never intend the withdraw assets from your ARF then the sequence of returns issue is largely irrelevant!