ETFs versus Stock Portfolio

jokerini

Registered User
Messages
90
In my opinion, an Irish investor is better off having a diversified portfolio of around 20/30 stocks than investing in ETFs.

1. An ETF often gives a false sense of security regarding diversification and risk reduction. For example, the very popular S&P 500 ETF is a market capitalisation weighted index. The top 6 companies (Apple, Microsoft, Alphabet, Facebook, Amazon, Tesla) account for 22.5% of the overall value of the index. It's tech-heavy and not as diversified as people may think. The NASDAQ ETF is even more concentrated with the same top 6 companies accounting for 44% of the overall value of the index!

2. Losses on an ETF cannot be offset against profits on other ETFS/stocks. This compares unfavourably with buying individual stocks.

3. The 8 year deemed ETF disposal and payment of exit tax 41% of ETFs is very harsh . The Irish government must have consulted with disciples of Karl Marx before introducing this regime. No such restrictions exist regarding individual stocks or closed-ended investment trusts.

4. Whereas popular ETFs like the S&P have low annual fees, some of the thematic ETFs can charge fees of up to 1% per annum. Individual stocks can be purchased cheaply these days as there is a lot of competition among online brokers.

It would make far more sense to allow distributing ETFs to follow the same CGT/dividend tax/no exit tax/no 8 year deemed disposal rules as other investments such as shares. I believe that the UK/US and most EU countries tax ETFs in such a manner. As it stands, accumulating ETFs offer a poor deal for Irish investors. How ironic, considering that so many worldwide ETFs are actually Irish-domiciled.
 

joe sod

Registered User
Messages
1,469
In my opinion, an Irish investor is better off having a diversified portfolio of around 20/30 stocks than investing in ETFs.
1. An ETF often gives a false sense of security regarding diversification and risk reduction. For example, the very popular S&P 500 ETF is a market capitalisation weighted index. The top 6 companies (Apple, Microsoft, Alphabet, Facebook, Amazon, Tesla) account for 22.5% of the overall value of the index. It's tech-heavy and not as diversified as people may think. The NASDAQ ETF is even more concentrated with the same top 6 companies accounting for 44% of the overall value of the index!
I think this is a crucial point which many new investors are not taking into account when they look to invest exclusively in the S &P 500, it has become very tech heavy now, that has been great for its performance in the last decade. However it should be remembered that the tech behemoths now like Amazon and Microsoft took over a decade to recover their year 2000 highs after the dot com collapse, how many tech investors then would have kept the faith and held on through all that time. Also remember that in 1989 the tech heavy Japanese
 
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Steven Barrett

Registered User
Messages
4,065
If you are focused on taxes, then investing in shares or investment trusts is the way to go. You also have to accept the increased investment risk that will go with it. If you are picking the stocks yourself, how skilled are you at picking stocks? Will you have a strategy? Will you know when to get our? Scottish Mortgage returned 111% last year and had 13.4% weighting in Tesla at one stage. Over the last 3.5 weeks, it fell by 21%. Over the same period the S&P 500 was up 1.14% and the MSCI World was up 0.16%.

Owning your own stock portfolio or an investment trust is completely different to following an index. Tax aside, an active portfolio can decide what weighting they want to take in any position, when to sell and what stock to own. A passive index follows the index, pure and simple. They are usually much more diversified, the MSCI holds 1,600 stocks and the S&P 500 holds 505 stocks.

If you think you can outperform the index go for it, there is plenty of research to say it is unlikely you won't. If your argument is tax, that's another argument.


Steven
www.bluewaterfp.ie
 

Marc

Registered User
Messages
1,506
In my opinion, an Irish investor is better off having a diversified portfolio of around 20/30 stocks than investing in ETFs.

1. An ETF often gives a false sense of security regarding diversification and risk reduction. For example, the very popular S&P 500 ETF is a market capitalisation weighted index. The top 6 companies (Apple, Microsoft, Alphabet, Facebook, Amazon, Tesla) account for 22.5% of the overall value of the index. It's tech-heavy and not as diversified as people may think. The NASDAQ ETF is even more concentrated with the same top 6 companies accounting for 44% of the overall value of the index!

2. Losses on an ETF cannot be offset against profits on other ETFS/stocks. This compares unfavourably with buying individual stocks.

3. The 8 year deemed ETF disposal and payment of exit tax 41% of ETFs is very harsh . The Irish government must have consulted with disciples of Karl Marx before introducing this regime. No such restrictions exist regarding individual stocks or closed-ended investment trusts.

4. Whereas popular ETFs like the S&P have low annual fees, some of the thematic ETFs can charge fees of up to 1% per annum. Individual stocks can be purchased cheaply these days as there is a lot of competition among online brokers.

It would make far more sense to allow distributing ETFs to follow the same CGT/dividend tax/no exit tax/no 8 year deemed disposal rules as other investments such as shares. I believe that the UK/US and most EU countries tax ETFs in such a manner. As it stands, accumulating ETFs offer a poor deal for Irish investors. How ironic, considering that so many worldwide ETFs are actually Irish-domiciled.

Of course the answer for many people is to purchase a global portfolio of non-EU ETFS and then you get the best of both worlds MUCH less risk through better diversification and the same tax treatment.


With Investment Trusts, I've been using a "closet indexing" approach for several years now to very good effect. We construct a portfolio which is as close as possible to the "market".

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This portfolio also happens to be tax free as the investor is non-domiciled
 
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MelF

Registered User
Messages
229
Would buying a lump of Berkshire Hathaway basically give you the best of both worlds then? Starting to invest and can't make head nor tail of ETFs and also want to use dollars so wondering if doing something like that (or some similar hedge fund stuff) would basically take the guesswork out of it. But I haven't a notion so...
 

Ordinary User

Registered User
Messages
27
@Marc Would you mind talking a bit more about being tax-free due to non-domicile status? Perhaps I'm missing something here as
I was looking at this recently and from what I could find, income from investment funds is taxed under case 4 to which remittance basis doesn't apply so no use of not being domiciled in Ireland. I most likely got something wrong here, so I would appreciate if you could explain. Thanks in advance.
 

Marc

Registered User
Messages
1,506
@Marc Would you mind talking a bit more about being tax-free due to non-domicile status? Perhaps I'm missing something here as
I was looking at this recently and from what I could find, income from investment funds is taxed under case 4 to which remittance basis doesn't apply so no use of not being domiciled in Ireland. I most likely got something wrong here, so I would appreciate if you could explain. Thanks in advance.

Yes it all comes down to using the right tool for the job. Very easy to get this sort of planning wrong. I've been in Ireland 12 years now and have a direct personal interest in the subject and 26 years experience in Financial Services and I still struggle with some issues.

I've written a detailed guide that you can purchase here



 
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