ETF Portfolio with European ETFs for 2021

Mr. The Poor Swiss | Updated: | Investing, Switzerland
ETF Portfolio with European ETFs

(Disclosure: Some of the links below may be affiliate links)

In 2022, Swiss investors may lose access to U.S. funds. DEGIRO already cut access to these funds. And Interactive Brokers may do the same next year. So, we need to be prepared for that eventuality. European ETFs are the alternative to U.S. ETFs.

You can also use mutual funds. It is almost the same thing as an Exchange Traded Fund (ETF). However, an ETF is much more flexible to invest in Europe. The main problem is that European ETFs are inferior to U.S. ETFs in many ways, as we will see in detail. Unfortunately, we may not have the choice to use them. The alternative of not investing at all would be much worse!

In this article, 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 select 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 only have disadvantages compared to U.S. ETFs.

First, European ETFs often have higher fees. The TER of European funds is almost always higher than the TER of U.S. funds. It is quite sad. For instance, Vanguard Total World ETF (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 TER 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 more costly than trading U.S. ETFs. With all the brokers I know, trading European ETFs is more expensive than trading U.S. ETFs. On Interactive Brokers, I can trade a U.S. ETF for less than 50 cents. But it cost me at least ten times more to trade a Swiss ETF. That is pretty terrible!

Another problem is that European ETFs 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! It is more important than the TER of the fund!

If you only have access to European ETFs, the best is to use funds 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.

If you want more details, I have an entire article about U.S. ETFs.

An example of ETF Portfolio

For a reference, let’s take a simple ETF portfolio I used in the past:

  • 20% Swiss Stocks: iShares Core SPI ETF (CHSPI): A TER of 0.10%.
  • 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 this portfolio is 0.087%. It may not be perfect, but I like this portfolio.

If we did not have access to U.S. funds, we would need to find two new funds for the U.S. stocks and 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 by replacing the S&P 500 ETF with a European 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 take the Vanguard fund. It has a slightly higher TER than Invesco. But it is five times bigger. And I 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 European ETFs following these two indexes:

  • HSBC MSCI World UCITS ETF: A TER of 0.15% and 1.6B of assets.
  • Invesco MSCI World UCITS ETF: A TER of 0.19% and 711M of assets.
  • Vanguard FTSE All-World UCITS ETF: A TER of 0.22% and AUM of 3.5B.
  • 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 too small, and the last two are too expensive. European options for World ETF are pretty weak. But that is the way it is. If I had to choose, I would take the HSBC fund. But to be honest, the Vanguard is also interesting, although a little expensive.

I try to only invest in distributing funds. It has several advantages when you are retiring. However, if you are considering investing in accumulating funds, you can consider the iShares MSCI World UCITS ETF (Acc). It has a TER of 0.20% and a considerable 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 0.129% TER. The difference is not so bad, but it is still a significant increase of about 30% of fees. And the quality of the ETFs is quite inferior. And, of course, we would lose 15% of the U.S. dividends.

Breaking down the world ETF

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

Since the European ETFs for world indices are not great, 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 European 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.

Note that this is meant as an exercise. I do not recommend going with a complicated portfolio. Having fewer funds makes it simple to invest.

Pacific ETF

Let’s start with stocks from the Pacific region.

A few indices are 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 can live without the Japanese stock market in my portfolio. If you cannot, you can 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 European 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 AUM.

Once again, the choice is not great. Usually, I would take a fund that distributes dividends instead of accumulating them. But here, I would not pay the premium. Moreover, the last two funds are too small. And the last one is 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 a European ETF for the European region.

Quite a few indices are 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, the indices mentioned before are the best representatives of European companies’ performance. So, let’s see the best European 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 leading 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 European ETFs for these two indices:

  • iShares MSCI Emerging Markets UCITS ETF (Dist): 2.3B CHF of AUM and a TER of 0.18%
  • 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%.

In this case, I would go with the iShares MSCI Emerging Markets UCITS ETF. It is a distributing ETF with a large size and a low TER.

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 final portfolio:

  • Swiss Stocks: 20%: iShares Core SPI ETF (CHSPI): TER of 0.10%.
  • 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%: iShares Emerging Markets UCITS ETF (Dist): TER of 0.18%.

This portfolio gives us a global TER of 0.105% for the entire portfolio. This portfolio is only slightly better than the version with the world ETF. It only has 0.024% fewer fees. And instead of merely having three funds, you have five funds.

I do not think this is better than the portfolio with the world ETF, honestly. But if you 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, you need to find the stock market index for each of these assets that you want to invest in. Finally, you will need to find the best ETF for each index.

And this exercise gets more complicated when you are limited to use European ETFs. As we saw before, these European ETFs are inferior to U.S. ETFs.

In the end, we end up with a portfolio with inferior funds with about a 30% increase in fees. And this is not counting the significantly higher trading fees. Finally, we will 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 has to comply with the new laws to Swiss investors, we will be stuck with European ETFs. Therefore, it is still better to be prepared for this eventuality.

Now, should we stop investing? No! Investing with European ETFs is much better than not investing at all. And it is not that bad. Even in Switzerland, some people prefer investing with European ETFs. It is not optimal, but it works!

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

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.

84 thoughts on “ETF Portfolio with European ETFs for 2021”

  1. Hi Mr. SwissPoor!
    Thank you for your good explanations.
    Could you please confirm I am tracking the correct ISIN numbers of these two ETF?

    HSBC MSCI WORLD UCITS ETF / IE00B4X9L533
    VANGUARD S&P500 / IE00B3XXRP09

      1. Great Blog Mr. SwissPoor!

        I just read this article and all the comments and now I am wondering how to determine the “correct” stock exchange?

        When I go on my Degiro account and search for IE00B4X9L533 (HSBC MSCI WORLD UCITS ETF) there are options from EPA and MIL in Euro and from LSE in USD.
        EPA seems to be the “free” option on Degiro but MIL has more volume, or should I even go for LSE because it is in USD?

        Thanks for your help!

        1. Hi Qrz,

          This is indeed sometimes complicated to choose stock exchange for the same ETF.
          In that case, it’s even more complicated because of DEGIRO.
          I honestly do not know what I would do. Ideally, you want USD because the fund itself holds USD. If you are Swiss, you do not pay to have a risk for EUR and USD. If you are European, then, having a EUR fund is not a big deal.
          But having the free ETF can be good, so in that case, I think that EUR in EPA makes the most sense.

          Sorry to not be of good help here. It’s a bit disappointing that DEGIRO limits the exchange for free trades.

          Thanks for stopping by!

  2. Hi Mr. The Poor Swiss,
    First of all, thanks a lot for the blog, it is very useful, especially as a foreigner.
    I am in a pretty similar situation as you, similar age, savings rate and goals, and also married with an Asian girl, Taiwanese in my case.
    I already have some mutual fund located in my home country however I would like to open an account in IB to start investing in ETFs and also individual shares.
    My main purpose is to decrease the interests I am paying at the moment and as a long-term investor, following the market is the most sensible way.
    After reading all alternatives, I believe the best choice would be an US ETF (distributing div), however as you said they may not be accessible in the short future in IB either.
    If I want to buy right now, what would you suggest? To buy US and wait for coming news or invest in European ETFs?
    I am permit B (EU citizen) paying “Quellensteuer”, never done Tax Declaration before, I believe I will have to do it in order to claim back withheld taxes

    1. Hi JdG,

      Thanks for the kind words :)

      For now, I would still go with U.S. ETF if you decide to go with Interactive Brokers. If you prefer to go with DEGIRO, you can go ahead and start investing with European ETFs.
      In the end, this is not what will change your future. It is good to optimize, but it is much more important to start investing.
      Yes, you will have to do a tax declaration in order to get back withheld dividends.

      Thanks for stopping by!

  3. Just to say that since April 2019 the HSBC MSCI World doubled in size and is now at 1.7B of assets.

    I have it since I only go with european exchanges:
    60% HSBC World
    20% V SP 500
    20% Ishares swiss Dividend

    I have a TER of 0.13%, not the most optimal but its easy to monitor and adjust.

    1. Hi Alex,

      Good catch, I have updated the article. This is a pretty impressive increase! With 1.7B, I now feel like it’s big enough to be a very good candidate!

      0.13% is not that bad indeed. I think it’s perfectly acceptable. And having a simple portfolio is important.

      Thanks for sharing!

    1. Hi,

      There are many good bond funds. But it will especially depends on which country do you want bonds?
      There are some international bond funds for instance. Or they are some European or Swiss bond funds, but these are currently in negative interest rate. So they are not much better than cash.

      Which country are you interested in?

      Thanks for stopping by!

      1. So I live in Switzerland but would prefer something like the Vanguage Total Bond Market or something equivalent for Europe that has a lowe TER (and maybe is a free ETF on Degiro). Let me know if you have any tips. Thanks!

        1. Hi Frenchy,

          I do not know much about bonds, but I would think that Vanguard USD Treasury Bond UCITS should cover the same thing as the Vanguard Total Bond Market (BND) fund.
          Why do you want to invest in U.S. bonds if you are in Switzerland?

          Thanks for stopping by!

  4. Hey, nice post!

    I’m a tax resident in Ireland. I was super excited to start investing in ETFs but got frustrated after realising the tax implications: when you sell shares (or even the no-longer available US domiciled ETFs) and make profit, you pay capital gains at 33% rate. It turns out, Irish/EU domiciled ETFs are taxed at 41% instead (dividends included) – https://www.irishtimes.com/business/personal-finance/don-t-invest-in-an-etf-until-you-understand-the-tax-1.3421331 . This is a big bummer.

    1. Hi Dummy Investor,

      Wow, that’s pretty insane. You always have to pay 33% on capital gains in Ireland?
      In Switzerland, most people do not pay taxes on capital gains (exception professional investors).
      This is obviously great!

      Thanks for stopping by!

  5. Could you please explain to me your comment:

    “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,”

    Why more efficient? I thought the law says it doesnt really make any difference?

    Also Im considering investing in only one ETF: The Vanguard ftse All World. On Degiro

    1. Hi Chris,

      That’s a good question. This is not clear indeed!

      Until now, I only invested in U.S. funds. This is because you can get back the U.S. dividends withholding. However, you cannot do that if you use an accumulating fund.

      But for EU funds, there are no difference in tax efficiency between accumulating and distributing. There is still one more reason I would prefer a distributing ETF over an accumulating one and it is for retirement. If you make 100% of your income on capital gains, you could get treated as a professional investor and get taxed for your capital gains. If you get dividends, some of your expenses could be using the dividends and you would not have to sell so much.

      Does that make sense?

      1. Hi Mr TPS,

        You mention that for Swiss law it doesn’t matter if the fund is distributive or accumulating.

        But in reality, capital gains are not taxed as opposed to dividend gains that are taxed as income.

        Care to elaborate more on that please?
        Thanks in advance

        1. Hi,

          What I mean is that the dividends generated by an accumulating funds are taxed in exactly the same way as a distributing funds.
          This means that the dividends accumulated in an accumulating funds are not counted as capital gains but as real dividends and they will be taxed as income.
          So, accumulating funds are not more tax-efficient than distributing funds.

          Thanks for stopping by!

  6. 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!

  7. 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.

    1. Hi hfng,

      Thanks for the precision, I will update the article :)

      Are you using IB? You can fill the W8BEN directly inside IB. This is what I did.

      I hope that helps

      Thanks for stopping by!

  8. 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,

  9. 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!

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