ETF Portfolio with European ETFs

Posted on

(Disclosure: Some of the links below may be affiliate links. For more information, read my disclosure.)

In 2020, Swiss investors may lose access to U.S. funds. DEGIRO already cut access to these funds. And it is highly likely that Interactive Brokers does the same next year. So, we need to be prepared for that eventuality. The alternative to U.S. Exchange Traded Funds (ETFs) is European ETFs.

You can also use mutual funds, it is almost the same thing. However, it is much more flexible to invest through ETFs in Europe. The main problem is that European ETFs are inferior to U.S. ETFs in many ways as we are going to see in details. Unfortunately, we may not have the choice to use them. The alternative of not investing at all would be much worse!

In this post, we are going to go through the multiple steps of designing a new portfolio. First, you need to decide the allocation of the different parts of the portfolio. Then, you need to choose between different stock market indices. Finally, you need to choose the best ETF for each index. I believe it is an excellent exercise. However, it is not trivial and should not be taken lightly.

European ETFs

European ETFs have almost only disadvantages compared to U.S. ETFs.

First of all, they often have higher fees. The TER of European funds is almost always higher than the TER of U.S. funds. This is quite sad. For instance, Vanguard total world fund (VT) in the U.S. has a TER of 0.09%. Their European equivalent Vanguard FTSE All-World ETF has a TER of 0.25%. This is almost three times more expensive. In some cases, you will find European ETFs with reasonable fees. But this will not be possible most of the time.

Not only are their fees higher, but trading European ETFs is actually more costly than trading U.S. ETFs. On all the brokers I know, trading European ETFs is more expensive than trading U.S. ETF. On Interactive Brokers, I can trade a U.S. ETF for less than 50 cents. But it cost me at least five times more to trade a Swiss ETF. That is pretty bad!

Another problem with European ETFs is that they are much smaller than their U.S. equivalent. A smaller fund means a larger bid/ask spread. It also means lower liquidity due to the lower trading volume. There is also a small risk that a fund that is too small gets closed. And finally, a fund that is too small cannot replicate the index as well as a bigger fund.

One big problem that many people do not consider is the difference in dividend taxes for many European investors. I did not research all the European countries. But this is true for Swiss investors. You should check if the same applies to you in your country. If you invest in U.S. funds, 30% of the dividends will be taxed.

However, you can reclaim 15% of the taxes via a W8BEN-E form. And some brokers, such as Interactive Brokers, will do that for you directly. And you can also account for the remaining 15% in your tax declaration. If you use Swiss funds, you will be taxed at 35% of the dividends. And there will not be a way to get it back! In fact, this makes more importance than the TER of the fund!

If you have access to only European ETFs, the best is actually to use bunds based in Ireland. In that case, you will be able to reclaim 15% of the dividends. But you will not be able to reclaim the 15% withheld by the U.S. taxes.

My current ETF Portfolio

For a reference, let’s take my current ETF Portfolio:

  • 20% Swiss Stocks: iShares Swiss Dividend (CHDVD): A TER of 0.15%.
  • 10% U.S. Stocks: Vanguard S&P 500 ETF (VOO): A TER of 0.04%. This fund has about 103 billion CHF.
  • 70% World Stocks: Vanguard Total World ETF (VT): A TER of 0.09%. This fund has about 12.71 billion CHF of Assets Under Management (AUM).

The average TER of my portfolio is 0.097%. It may not be perfect, but I like this portfolio. In the future, I may change my Swiss stocks ETF. I am also considering changing the allocation to U.S. Stocks.

If I did not have access to U.S. funds, I would need to find two new funds for my U.S. stocks and for the World Stocks. For this exercise, we are going to keep the same portfolio. There is no need to choose different stock market indexes. However, for each index, we need to choose a fund that follows it.

S&P 500 ETF

Let’s start with the replacing of the S&P 500 ETF. There are quite a few options available to us (you can search on justETF for instance). There are three options that I would consider for this ETF:

  • Invesco S&P 500 UCITS ETF: A TER of 0.05% and AUM of 4.5B
  • iShares Core S&P 500 UCITS ETF: A TER of 0.07% and AUM of 8B.
  • Vanguard S&P 500 UCITS ETF: A TER of 0.07% and AUM of 22B.

Given these choices, I would personally take the Vanguard fund. It has slightly higher TER than Invesco. But it is five times bigger. And I really like Vanguard Philosophy.

European ETF Portfolio with Total World ETF

For the world ETF, there are two indices that we can consider: The MSCI World index and the FTSE All-World index. Here are some interesting ETFs following these two indexes:

  • HSBC MSCI World UCITS ETF: A TER of 0.15% and 858 millions of assets.
  • Invesco MSCI World UCITS ETF: A TER of 0.19% and 711 millions of assets.
  • Vanguard FTSE All-World UCITS ETF: A TER of 0.25% and AUM of 2.3B.
  • iShares MSCI World UCITS ETF (Dist): A TER of 0.50% and 5B of assets.

Honestly, I do not like any of these options. The first two funds are simply too small and the last two are too expensive. European options for World ETF are pretty poor. But that is the way it is. If I had to choose, I would take the HSBC fund.

I personally try to only invest in distributing funds. This is more efficient for tax reasons. However, if you are considering investing in accumulating funds as well, you can consider the iShares MSCI World UCITS ETF (Acc). It has a TER of 0.20% and a very large AUM of 17B dollars. This iShares ETF is a good fund if you want to invest in accumulating funds. It is still more expensive than the HSBC fund. But it is much larger.

That would give an updated portfolio with 0.139% TER. This is not so bad a difference but still a significant increase of about 30% of fees. And the quality of the ETFs is quite inferior.

Breaking down the world ETF

Can we break down the World ETF?
Can we break down the World ETF?

Since the European ETFs are not really good, we can try to replicate the performance of the World index by using several ETFs. Here is the composition of the Vanguard World ETF (VT):

  1. North America: 58.40%
  2. Europe: 18.60%
  3. Pacific: 13.30%
  4. Emerging Markets: 9.40%
  5. Middle East: 0.20%
  6. Other: 0.10%

I think we can safely ignore the last two regions and still have a good representation of the entire market. If I were to replicate the performance of the world ETF, I would use the following percentages:

  1. United States: 60%
  2. Europe: 15%
  3. Pacific: 15%
  4. Emerging Markets: 10%

But the World ETF is only 70% of my portfolio. If we take this into account, I think I would go with:

  • Swiss Stocks: 20%
  • U.S. Stocks: 50%
  • Pacific Stocks: 10%
  • Europe Stocks: 10%
  • Emerging Markets Stocks: 10%

You could also go 5% of Emerging Markets or even nothing. But that would probably be too much optimization already.

Now that we have our new allocation, we need to find ETFs for these regions. We already have an ETF for the first two regions. We need one for the three remaining regions: Pacific, Europe, and Emerging Markets.

Pacific ETF

Let’s start with stocks from the Pacific region. There are a few indices covering the Pacific. What is interesting is that Japan is out of these indices. Since the big collapse of the Japanese market around 1986, it has been excluded from many indices. I personally can live without the Japanese stock market in my portfolio. If you cannot, you can simply use a Japan index as well as a Pacific index. Therefore, we can go with the MSCI Pacific ex-Japan index. There are a few ETFs option for this index:

  • iShares Core MSCI Pacific ex Japan UCITS ETF (Acc): A TER of 0.20% and 1.6B of managed assets.
  • UBS ETF (LU) MSCI Pacific (ex-Japan) UCITS ETF (USD) A-dis: A TER of 0.30% and 175 million CHF managed.
  • HSBC MSCI Pacific ex Japan UCITS ETF USD: A TER of 0.40% and 36 million of AUM.

Once again, this is not really great. Normally, I would take a fund that distributed dividends instead of accumulating. But here, I would not pay the premium. Moreover, the last two funds are simply too small. And the last one is really too expensive. So, I would personally go with the iShares fund for my 10% Pacific stocks.

Europe ETF

We need a Europe ETF
We need a Europe ETF

Now, we need an ETF for the Europe region. There are quite a few indices covering this region. The first index we can take a look at is the FTSE Developed Europe index. Another one is the MSCI Europe index. Both these indexes only cover large-cap and mid-cap companies. A very popular index is the STOXX Europe 600 (or Euro Stoxx 600). It is a bit special since it contains 200 large-cap companies, 200 mid-cap companies, and 200 small-cap companies. I think it is an interesting index as well.

There are other indexes, for instance, the MSCI EMU. But in my opinion, these are the best representatives of the performance of the European companies. So, let’s see the best ETFs we can find with these indexes:

  • iShares Core MSCI Europe UCITS ETF: 5.1B of AUM and a TER of 0.12%.
  • Vanguard FTSE Developed Europe UCITS ETF: 1.8B of AUM and a TER of 0.12%
  • Xtrackers MSCI EMU Index UCITS ETF 1D: 2.4B of AUM and a TER of 0.12%.
  • Amundi STOXX Europe 600 UCITS ETF: 435M of AUM and a TER of 0.18%.
  • Invesco MSCI Europe UCITS ETF: 529M of assets and a TER of 0.19%
  • Invesco STOXX Europe 600 UCITS ETF: 279M of assets and a TER of 0.19%.

Given these choices, I would go with the iShares Core ETF. It is large enough and the TER is quite good. Moreover, I prefer the MSCI Europe index to the FTSE Developed Europe index. But again, these are personal reasons. You can choose another ETF or another index!

Emerging Markets ETF

The last ETF we have to choose is an ETF for the Emerging Markets. There are two main indices for these markets: The MSCI Emerging Markets and the FTSE Emerging Markets. I do not have a preference for one or the other. Let’s look at the best ETFs for these two indices:

  • Amundi MSCI Emerging Markets UCITS ETF (Acc): 3.8B CHF of AUM and a TER of 0.20%.
  • Xtrackers MSCI Emerging Markets UCITS ETF 1C (Acc): 1B of assets and a TER of 0.20%.
  • UBS ETF (LU) MSCI Emerging Markets UCITS ETF (Dist): 1.3B and a TER of 0.23%.
  • Vanguard FTSE Emerging Markets UCITS ETF (Dist): 1.8B CHF of AUM and a TER of 0.25%.
  • HSBC MSCI Emerging Markets UCITS ETF USD: 2.5B CHF of assets and a TER of 0.40%.

The first two ETFs are cheaper but are accumulating ETFs. Given the small difference, I would take the distributing Vanguard fund over them and over the UBS fund as well for the small size advantage and for the Vanguard advantage.

European ETF Portfolio with multiple ETFs

Finally, we are done! We have chosen a portfolio, chosen the stock market indices and chosen the ETFs. Here is the portfolio finally:

  • Swiss Stocks: 20%: iShares Swiss Dividend (CHDVD): TER of 0.15%.
  • U.S. Stocks: 50%: Vanguard S&P 500 UCITS ETF: TER of 0.07%.
  • Pacific Stocks: 10%: iShares Core MSCI Pacific ex-Japan UCITS ETF (Acc): TER of 0.20%.
  • Europe Stocks: 10%: iShares Core MSCI Europe UCITS ETF: TER of 0.12%.
  • Emerging Markets Stocks: 10%: Vanguard FTSE Emerging Markets UCITS ETF (Dist): TER of 0.25%.

This gives us a global TER of 0.122% for the entire portfolio. This is only slightly better than the version with the world ETF. This is only 0.017% fewer fees. And instead of simply having three funds, you have five funds. I do not think this is better honestly. But if you really want to minimize fees, this is the way to go. And I believe that these funds are a bit better together than the HSBC world fund. But it is up to you to decide if you prefer lower fees or a simpler portfolio.

Conclusion

As you can see, it is not an easy thing to design an entire ETF portfolio from scratch. First, you need to decide the allocation of the different regions or even investing instruments (bonds and stocks for instance). Then, for each of these assets, you need to find the stock market index that you want to invest in. Finally, you will need to find the best ETF for each index.

In the end, we end up with a portfolio with inferior funds with about 30% increase in fees. And this is not counting the trading fees that are significantly higher. Finally, we are going to pay much more taxes on the dividends since we cannot reclaim the U.S. dividends anymore. Overall, we are probably looking at twice the fees of the original portfolio.

Unfortunately, we may not have the choice to do the switch. If Interactive Brokers applies the new laws to Swiss investors, we will be stuck with European ETFs. Therefore, it is still better to be prepared for this eventuality.

How would your portfolio look like without U.S. funds? Would you do it differently?

Mr. The Poor Swiss

Mr. The Poor Swiss is the author behind thepoorswiss.com. In 2017, he realized that he was falling into the trap of lifestyle inflation. He decided to cut on his expenses and increase his income. This blog is relating his story and findings. In 2019, he is saving more than 50% of his income. He made it a goal to reach Financial Independence. You can send Mr. The Poor Swiss a message here.

34 thoughts on “ETF Portfolio with European ETFs”

  1. You have skipped the cheapest ETFs and most important ETFs for Europe imvestors, and it is clear that your preparation was bad.

    For MSCI World ETF you have skipped most popular and biggest ETF IWDA TER:0.2%
    iShares Core MSCI World UCITS ETF

    There is also new listed SPDR MSCI World UCITS ETF,TER:0.12%

    For Emerging Markets you have skipped
    most popular ETF EIMI
    iShares Core MSCI EM IMI UCITS ETF TER:0.18%

    For Europe you have done same thing, you have skipped cheapest ETFs

    1. This has nothing to do with bad preparation.

      The iShares ETFs you mentioned are accumulating and as I mentioned, I prefer distributing funds.
      And all my research is based on justetf and on availability in my two brokers. As of this time, the SPDR fund is still not available on either of them.

      So next time you comment, you can take a little more time to consider what you are commenting on.

  2. Hi Mr. The Poor Swiss,

    Thank you for sharing your ideas.

    You mentioned “I personally try to only invest in distributing funds. This is more efficient for tax reasons.”
    Could you please explain the reasons behind that?

    1. Hi Aleksei,

      I should have explained that better :P

      There are three reasons for preferring distributing over accumulating funds:

      1. In any case, you will pay the same amount of taxes on both. The Swiss tax system will tax you on the dividends made by the fund. Sometimes, it is difficult to fill your tax declaration because their dividend declaration come after the declaration date. And there are a few cases where the tax organization cannot find out what is dividend and what is capital gain and therefore will tax you on both! However, in general for European ETFs, this should not be a problem. In the case of U.S. ETFs (not the subject of this article, but I am trying to thorough), you can reclaim half of the dividends tax when you fill your tax declaration. However, if the ETF is accumulating, you cannot reclaim this. This is about a 0.3% extra fee!
      2. Distributing funds can help you rebalancing by providing you some extra cash that you can invest where your funds are out of allocation
      3. When you are retired, you will need the dividends to live off. The difference is that dividends do not incur transactions fees. And also, if you live only from selling shares, you may considered a professional invested and your capital gains may be taxed.

      For all these reasons, I try to only invest in distributing ETFs, especially for my big allocation.

      I hope this clarifies :)

      1. Hi Mr. The Poor Swiss,

        Thanks a lot for your clarification.

        I am now thinking about the two distributing ETFs for the Europe region you mentioned:
        1) iShares Core MSCI Europe UCITS ETF: 5.1B of AUM and a TER of 0.12%. (https://www.justetf.com/ch-en/etf-profile.html?isin=IE00B1YZSC51)
        2) Vanguard FTSE Developed Europe UCITS ETF: 1.8B of AUM and a TER of 0.12% (https://www.justetf.com/ch-en/etf-profile.html?isin=IE00B945VV12)

        I agree that iShares is the largest fund in this area, but while comparing the two I’ve found another difference – replication. The first has Physical (Optimized sampling), but the second has Physical (Full replication). Does it make a big difference? I also noticed that currency of both funds is EUR, not USD. I guess it is worth noting because you are looking for replacement of Vanguard Total World Stock ETF which is in USD.

        1. Hi Aleksei,

          These are two good funds!

          For the EUR currency, I think it’s good. It’s an ETF about Europe and the currency in Europe is EUR. So it makes sense to trade it in EUR.
          For the replication, thanks for pointing that out! I didn’t notice it myself. It makes a small difference. The Vanguard funds has 606 shares while the ishares one has only 439 shares. If we compare the performance, the Vanguard performed slightly better over time than the ishares one, but it is a very little difference. And the Vanguard fund has 3.6% dividend yield while the ishares ETF only has 3%.

          Given the full replication, I would go with Vanguard fund here!

          Thanks for pointing that out!

          1. Hi Mr. The Poor Swiss,

            I am thinking now about Vanguard FTSE Developed Europe UCITS ETF.

            In IB WebTrader if you search for isin=IE00B945VV12 you will get several results:
            1) VANG FTSE EUR EURD (ETF), VEUR, AEB, 30.37, EUR
            2) VANG FTSE EUR EURD (ETF), VEUR, EBS, 34.50, CHF
            3) VANG FTSE EUR EURD (ETF), VEUD, LSE, 34.08, USD
            4) VANG FTSE EUR EURD (ETF), VEUR, LSE, 26.19, GBP
            5) VANG FTSE EUR EURD (ETF), VEUDN, MEXI, 0.0000, MXN

            The last column shows currency, but what does this currency mean in all these cases?
            According to this page https://www.justetf.com/ch-en/etf-profile.html?isin=IE00B945VV12 the fund currency is EUR, but looking at these results I see CHF, USD, GBP.
            Maybe they are all about the same fund – just allow investors to buy the same ETF for different currencies? In this case why are there 3 different symbols: VEUR, VEUD and VEUDN?
            And what is the best way to buy this ETF: convert CHF to EUR and buy the first ETF in the result or buy the second ETF without any exchange?

            Any idea?

          2. Hi Aleksei,

            If you look on your justetf link under the Listing Tab, you will also find some of these listings. The same fund can be listed on different exchanges and with different currencies. If it is listed twice on the same exchange with a different currency, it needs a different ticker for each currency.

            As you said, this fund is held in EUR by Vanguard. However, you can trade it in other currencies. All these listings are exactly the same fund indeed! This only means that the money will be directly converted into the target when you buy the fund. Although, I do not know if there are fees and I do not know if the currency exchange will be done at a good rate. I expect fees at least. And the fees will also occur when you sell your shares.

            I believe that the best way to do it is to convert CHF to EUR and buy the first ETF. IB has good currency exchanges fees and I would trust it more to do the conversion myself and then buy the fund in the correct currency. I think this will save you some money on fees. That’s what I am doing with my funds at least.

            Does that help?

  3. Nice post, I agree with you.
    I am in a similar situation, and I have chosen similar ETFs that distribute dividends (for simplicity, because I am tax resident in Germany).
    One comment: I have chosen Vanguard Developed Asia Pacific ex Japan. It is small (about 350 million EUR), but it distributes dividends. It is available in EUR, GBP, and I am sure CHF as well.
    Thank you for the analysis.

    1. Hi willy,

      How is the tax system for ETF in Germany? Do you also have tax withholding on the dividends?

      Yeah, Vanguard Dev Asia Pacific ex-Japan is also an excellent choice! I tried to focus on a few simple ETFs, but there are many more valid combinations available.

      Thanks for stopping by :)

  4. The foreign withholding tax ratio is not presented in the fact sheet or KID. This tax is like a hidden fee and unpleasantly high.

    I tried to find how large the foreign withholding tax ratio is for VT and the numbers are from the annual report. Dividend after the withholding tax is taken is 379.901 million, foreign withholding tax is 22.221M, withholding ratio is 5.52%. Annual reports are at https://personal.vanguard.com/us/litfulfillment/ELFReports?categoryCd=PRRP&subcategoryCd=ETRP&view=default

    The European cousin is Vanguard FTSE All-World UCITS ETF VWRL or VRRD. The indexes are not the same and this is perhaps comparing apples and oranges. On annual report page 59 the dividend income before withholding is 43,044,701 and foreign withholding tax is 5,268,891. Their ratio is 12.2%. Annual report from: https://www.vanguardinvestor.co.uk/investments/vanguard-ftse-all-world-ucits-etf-usd-distributing

  5. NIce article about the ETC choices.

    Regarding the tax system in Germany – you may have heard the saying , that 75% of all the tax literature in the world is coming from Germany :)

    But for dividends it is not that complicated (at least on first sight).
    We pay the 25% tax (Quellensteuer) on dividends as well as on capital gains. On top of that a liitle bit Soli (Solidaritätszuschlag – the Berlin Wall fell 1989, but come on there´s still work to do, so why kill such a nice tax :)
    And depending on, if you are a registered believer, there comes the tax for church (Kirchensteuer)

    So bottom line we are somewhere in the region of ~27% tax.

    For many countries like the US there are anti-double tax treaties in place, so that taxes already paid there will be more or less subtracted from the tax burden in your home country.

    Where it is getting really complicated is the new ” preemptive strike” taxation on investment funds. Brussels idea was to “simplify” the different taxation on acc & dist funds and as a sidekick kill some of their most unwanted constructions ( “tax evasion millionaires funds). What they came up with is the so called MIFIDII monster. I heard the regulation is worth 40.000 pages :)

    Bottom line for the small investor: Not much will change, but the bureaucrats may come up with more crap to fill out and they may force owners of investment funds to pay ahead (yes AHEAD) for possible and typical yields that are simulated via a complicated formula. for different classes of investment funds.

    In the end it is not much to worry about , since the typical amounts can be considered “peanuts”, but it is just another nonsense they come up with.

    By the way ” peanuts”, to quote a famous banker form Deutsche Bank. Isn´t there a DB XTracker for the MSCI World, which has low cost (maybe swapped though) ?

    1. Hi Senior Crow,

      I never heard the saying no :P

      Yeah, 1989 is still so close ;) 27% tax does not seem so bad, but it seems the overall system is very complicated indeed.

      Yes, there is an XTrackers ETF for MSCI World. In fact, there are two (one acc, one dist) with 0.19% TER. I didn’t include the distributing one because it is a sampling one. But I should have included it for better comparison! Or at least mention it! I will do that in the next update of the article. Thanks for pointing that out!

      Thanks a lot for sharing all these details! It’s very interesting!

  6. Hi Mr. Poor Swiss,

    What do you think about Lyxor Core STOXX Europe 600 (DR)?
    It has a TER of 0.07%, almost 1B assets under management and I think that it is also distributed.

    Nice post and thanks for sharing your journey through the complex world of investment, it has helped mine as well.

    1. Hi Pedro,

      You’re welcome! I am glad this is useful!

      It is a good ETF for Europe coverage. It has a good size and a very good price. However, it seems it is only available in accumulating ETF (here). Its name ends with Acc which is short for Accumulating.

      If you find the Distributing version then it’s great!

      Thanks for stopping by :)

  7. I was hoping the comparison would include a summary or real returns (not nominal) of some of the popular funds described. I think taxes and fees are very important and impact return but so does performance.

    I am not into shares at all, but I am planning to diversify in the future and i like your analytical comparisons and writing very much.

    I found the understanding tax impact of gains and dividends is not easy and depending on your circumstances it gets messy real quick. Your comments and detail she’d some light on potential impact and what to rewatch out for before making a decision.

    Keep up the great work!
    Financial Gladiator

    1. Hi Financial Gladiator (Cool name!),

      That’s a good point. Normally, the returns of the funds should only be tied to the index performance and the fees. However, the size of the fund can also play a role since not all funds will have all the shares of the index. I will try to add more information once I revise this blog post.

      Yes, the tax impact of gains and dividends is very complicated. There are so many details that are important. I think it should really be simplified. But in the meantime, we have to do everything we can to optimize that.

      Thanks for stopping by :)

  8. Thank you for this article. Since DeGiro has changed their Vanguard offerings this helped me a lot to recreate a worldwide and balanced portfolio.

  9. „If you use European funds, you will be taxed at 35% of the dividends. And there will not be a way to get it back!“

    Could you elaborate on this claim? Can’t quite follow. I thought that…

    1. Some countries do not levy withholding on companies (dividend) distributions to shareholders (among them ETFs), some don‘t. The United Kingdom, for instance, does not levy withholding tax on such distributions. Other countries, but (notably) the U.S.-Irish double taxation treaty should provide for a reduced rate of 15% on dividends.

    2. The biggest share of European ETFs funds is held by funds domiciled in Ireland – a country that should not levy no withholding tax on ETF distributions to non-resident personal investors (persons living in Switzerland). Same should be true for Luxembourg, being another important ETF domicile.

    Other countries might apply withholding tax on distributions – but you can claim these back for many countries with form DA-1 – same as for U.S. funds.

    3. Finally, for Swiss securities and funds, distributions might be subject 35% Swiss withholding tax (Verrechnungssteuer) – which you can claim back with your Swiss return.

    Now, everything above is just from my knowledge and understanding. There might indeed be some withholding tax that you can’t (at all or not efficiently) claim back, especially on the level of distributing stock to fund. But I can‘t see in which case it would be 35%. Should be much less, in most cases (notably, the Irish ETF would receive U.S. dividends less 15% withholding tax, which U.S. based funds might not be subject to).

    But it‘s not like the U.S. based fund (ETF) would be free from those taxes in every case. Depending on a country‘s withholding tax regime, and agreements with the U.S., the U.S. based ETF might just as well be subject on distributions from its stock investments in third-party countries that it (or the holder of ETF shares) cannot claim back.

    1. Hi San Francisco,

      Yes, I will elaborate. It was pretty clear in my head when I wrote this but I have to admit that what I wrote is not clear :S I will improve this section of the article once I get some time. Thanks for pointing that out.

      I was talking only about dividends that are issued by U.S. securities. As you mentioned, other countries are also doing it. However, the U.S. is more than half of the world stock market. So even if you invest in all the world, half of your dividends are going to come from U.S. securities and 15% are going to get taken out these dividends. It’s pretty big!

      The withholding is done at the assets level and therefore is withheld regardless of the fund domicile. If the fund is in Europe, the U.S. government will still take 15% of the dividends before it arrives at the fund.

      The big difference is that you only reclaim these U.S. withholding if the fund is in the U.S. If the fund is in Ireland, you cannot reclaim it.

      Of course, this only applies to U.S. securities. If you have a U.S. fund with European securities, it’s a whole another story.

      The 35% is if you use Swiss Funds, which is actually the worst case! I should have mentioned other cases. You will 0% irrecoverable withholding in the U.S. but 15% irrecoverable in Ireland.

      Does that make more sense now?

  10. Hi Mr. Poor Swiss

    And thanks for your quick reply.

    I‘m not sure I wrap my head around the 35% tax rate when using Swiss funds. As I understand it: Firstly, the U.S.-Swiss double taxation treaty provides for a reduction in U.S. withholding tax on dividends to non-residents from a 30% non-treaty rate down to 15%. Same thing as in Ireland, basically.

    Distributions from the funds to the individual investor are then subject to 35% anticpatory withholding tax (Verrechnungssteuer) – which the individual investor resident in Switzerland can then claim back on his tax return. Am I making a mistake here?

    1. Hi San Francisco,

      It turns out I was not totally correct about the 35% for Swiss funds. This is correct for the dividends issued by Swiss companies and funds. This is anticipatory taxes, that you can deduct on your tax declaration. Now, if a Swiss fund has equities from other countries, I do not know exactly how it will work. I will have to research more.

      However, if a Swiss funds has U.S. equities, you will still pay the 15% withholding. You will indeed be reduced from 30% to 15%, but you cannot reclaim that last part unfortunately since it can only be reclaimed if the fund is domiciled in the U.S. And then, you will have to pay 35% extra withholding on top of that. But this extra percentage can be reclaimed.

      Thanks for pointing all that out!

  11. Hi Mr Poor Swiss
    Great blog, thanks for all your insight.
    I have a question on investing in ETFs, sorry if it has been covered somewhere else.
    Most of the ETFs have a CHF hedged version. The benefit is its in the currency I live, and downside is the extra cost and the small size of the funds.
    I think you don’t look at the CHF hedged versions at all. Why is this? The FX side is not important? Or another reason?
    I ask because I am going to start investing in some ETFs, and was thinking to remove the FX part from the investment by going into the CHF hedged version.

    Thanks

    1. Hi Vegas8,

      Welcome to the blog!

      Yes, I let me out on purpose. Unfortunately, currency hedging as a significant cost. All currency-hedged ETFs have higher TER than their normal equivalents.
      Now, of course, they have the advantage of removing the currency risk. However, they will not remove all the currency risk only the conversion risk for you. Do not forget the many companies have currency risk when they export or import. And as such, you are not protected against that risk.
      On the long-term, if you invest regularly, you should not worry too much about currency exchanges. However, currency hedging makes sense for shorter term investing (a few years).

      Does that clear up hedging?

      Thanks for stopping by!

      1. Thanks for the quick reply. Yes, that clears it up. I am looking long term, so wont waste time on the chf classes. They seem way too small as well as being expensive.

        Thanks for your help,

  12. Thank you for the excellent article. You mentioned that “you can reclaim 15% of the taxes via a W8BEN-E form”. However, I checked and W8BEN-E forms are for entities. For foreign individuals, we are supposed to use W8BEN (without the “-E”) and so far I have been subject to the 30% tax. Any thoughts? Thanks.

  13. Hi,

    very interesting post! I have been investing in ETFs quoted on European exchanges such as Xetra or Euronext because either they are not available on SIX, or available but in the wrong currency (CHF instead of EUR), or simply too small, not liquid in on SIX. However, I am not sure how these investments will be tax. Do you have any input about this?
    Thanks a lot and looking forward to more posts from you!
    Best,
    Irma

    1. Hi,

      The taxes will mostly depend on where is the fund domicile. If the fund is in Switzerland, you will pay normal swiss Taxes. If the fund is in Ireland, it will be a bit more effective.
      And in the U.S., it will be the best because of the taxation treaty between our countries.

      If you invest in European stock exchanges, you should probably look for Ireland ETFs.

      Thanks for stopping by!

Leave a Reply

Your email address will not be published. Required fields are marked *