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What makes U.S. ETFs so great?

Baptiste Wicht | Updated: |

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

I mostly invest in U.S. ETFs, and I have recommended these ETFs many times on this blog. I consider U.S. ETFs to be the best available ETFs. I have talked several times about what makes them great in various articles. But since I still get many questions, I will go into all the details of these U.S. ETFs.

I am talking about Exchanged Traded Funds (ETFs) that invest in the United States. I talk specifically about ETFs from the United States. What matters here is the domicile of the ETF. This is more important than many people realize.

So, here is what makes these U.S. ETFs great.

Availability of U.S. ETFs

First, we need to address the issue of the availability of U.S. ETFs, or lack thereof.

If you are in the United States, you will not have any issues. However, if you are in Europe, this is another story. Indeed, due to European regulations, many countries lost access to U.S. ETFs.

In fact, in 2018, all the countries part of the European Union lost access to U.S. ETFs. This is due to the PRIIPS regulations. These regulations are part of a bigger package known as MiFID II. These laws force the fund providers to provide a Key Investor Document (KID) in the investor’s language. And so far, U.S. fund providers have not provided them, and they are unlikely to do it. So, for now, European investors cannot invest in U.S. ETFs.

In theory, these laws protect investors by giving them more information on the instruments they are using. However, in practice, they are only here to force people to invest in European funds.

However, Switzerland is not part of the European Union. Therefore, Swiss investors still have access to U.S. ETFs. However, this may change when the Swiss equivalent of the European laws enters into effect. Now, it is not entirely clear if this will apply to foreign brokers (like Interactive Brokers) or not. But for now, we are free to use these ETFs.

I believe these restrictions will not apply to execution-only brokers like Interactive Brokers. So, they should still be available in the future.

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Furthermore, not every broker gives us access to these ETFs even though they could do it by law. For now, only foreign brokers, like Interactive Brokers, give access to these ETFs. This is good since Interactive Brokers is the best broker for Swiss investors.

If you want more information on these regulations, you can read my article on the availability of U.S. ETFs.

U.S. ETFs have lower fees

The first advantage of U.S. ETFs is that they have lower fees than their European alternatives.

What matters to us is the Total Expense Ratio (TER) of the ETFs. The TER is the total fee you pay for holding the money. This fee is expressed in percentage and is removed from your money over the year. So, if you have a TER of 0.1% and 100,000 CHF in the fund, you will lose 100 CHF each year to fees.

Since you will pay the fees each year, it is important to optimize them. If you are a passive investor, ongoing fees are the most important cost you can optimize. So, it is important to do it well. And the more money you have in the funds, the more fees you will pay.

We can compare a few ETFs to see the difference in fees:

  • Vanguard S&P 500: The U.S. ETF (VOO) has a TER of 0.03%, while the European ETF (VUSA) has a TER of 0.07%, twice more expensive
  • Vanguard World: The U.S. ETF (VT) has a TER of 0.08%, while the European ETF (VWRL) has a TER of 0.22%, almost three times more expensive
  • iShares S&P 500: The U.S. ETF (IVV) has a TER of 0.03%, while the European ETF (IUSA) has a TER of 0.07%, twice more expensive
  • iShares World: The U.S. ETF (URTH) has a TER of 0.24%, while the European ETF (IWRD) has a TER of 0.50%, twice more expensive

As you can see, the TER of European funds is significantly higher than U.S. ETFs. Over the long term, this will make a significant difference in your returns.

When you are investing in ETFs, investing fees are not to be ignored. And this is especially true if you want to retire early based on your portfolio.

U.S. ETFs are more tax-efficient

The second advantage is even more significant, but it is also a bit more complicated and is only for Swiss investors. Indeed, U.S. ETFs are more tax-efficient for Swiss investors.

This tax efficiency is based on the way dividends are taxed. Especially how the U.S. taxes dividends of U.S. companies.

By default, the U.S. government will tax 30% of the dividends emitted by U.S. companies to foreign investors. Now, Switzerland has a tax treaty that reduces this withholding to 15% for Swiss investors, the same amount withheld for U.S. investors. And on top of that, we can reclaim the 15% left on our tax declaration.

But when we use an ETF in Europe, the dividends will be withheld before reaching the fund. For instance, if you invest in an ETF from Ireland with Coca-Cola shares, you will lose 15% of these dividends directly. But if these dividends are paid to a U.S. fund, there is no loss!

This advantage is essential since U.S. stocks make up 50% of the entire world stock market. Saving on the dividends of these stocks is very important.

The second-best domicile for ETFs after the U.S. is Ireland. So, if you do not have access to U.S. ETFs, Ireland (IE) ETFs are the next best thing.

Overall, how much you save will depend on the yield of the ETFs you are using. For a 2% yield, you will save 15% of 2%, which is 0.3%. So, by using U.S. ETFs, you can save up to  0.3% in fees every year! On a 100’000 CHF portfolio, you can save 300 CHF per year!

However, it is important to know that this deduction can only be claimed when it reached 100 CHF. Below 100 CHF, taxes will reject this deduction. So you will need about 33’000 CHF in US ETFs before you can claim it.

U.S. ETFs are larger

A small advantage is that U.S. ETFs are larger and more liquid. By large, I mean that they are managing more money. Generally, this is exposed as the Assets Under Management (AUM) metric.

A larger ETF has a few advantages over a smaller one:

  1. It shows more popularity. Larger funds are generally large because they are very popular (people put their money in them).
  2. It has a lower chance of being closed.
  3. A larger ETF has a higher trading volume. This has the advantage of the ETF being easier to sell. Generally, they also have a lower spread, which gives you better buying and selling prices.
  4. A larger ETF can better replicate the index since it will include more small companies than a smaller ETF.

For these reasons, large ETFs are generally better than small ETFs. But this should not be the primary argument in choosing an ETF.

U.S. ETFs are cheaper to trade

The last advantage is that U.S. ETFs are cheaper to trade (with a good broker) than European ETFs.

This is not directly due to the fund itself but rather to the stock exchange they use.

For instance, my primary ETF, Vanguard Total World (VT), is traded on the New York Stock Exchange (NYSE). To buy or sell shares with Interactive Brokers costs me about 0.35 USD. I can buy many shares and still pay less than a dollar for the transaction.

On the other hand, buying 10’000 CHF of my Swiss ETF, iShares Core SPI ETF (CHSPI) on the Swiss Stock Exchange (SWX), cost me 10 CHF! That is about 30 times more expensive than my U.S. ETFs.

And European ETFs are about in the middle of Swiss ETFs and U.S. ETFs. To my knowledge, U.S. ETFs are the cheapest to trade. Now, this may change if you use a service with free transactions. But there are very few good services like this available in Switzerland yet.

What about the U.S. Estate Tax?

Many believe we should not invest in U.S. ETFs because of the U.S. Estate Tax. And in some cases, this is true. But in practice, for Swiss investors, there is almost no risk in investing in U.S. ETFs.

The U.S. Estate Tax law states that the inheritance of U.S. ETFs is subject to a 40% inheritance tax. Nonresident aliens (basically, foreigners outside of the United States) are exempted from this tax for assets up to 60’000 USD. After this, foreigners will have to pay a 40% tax.

This means that if you have many U.S. assets, they could lose much value when you pass away, and your assets go through inheritance. You do not want this to happen to your estate.

However, many people miss that Switzerland has an estate tax treaty with the United States. And this treaty greatly increases the part exempted from this estate tax!

With this estate tax treaty, Swiss investors are exempted from the U.S. estate for up to 11.18 million dollars, prorated to the proportion of U.S. Assets in your net worth. For instance, if U.S. ETFs form 10% of your estate, 1.118 million dollars (10% * 11.18 million) will be exempted from U.S. Estate Tax!

So, in most cases, Swiss investors do not have to worry about the U.S. Estate Tax!

If you want all the details and many more examples, you can read my in-depth article about the U.S. Estate Tax law.

What if you cannot use U.S. ETFs?

Unfortunately, many people do not have access to these great U.S. ETFs.

For these people, investing in European ETFs is still an excellent option. Using U.S. ETFs is the best way to invest. However, it is an optimization over European ETFs. There is nothing wrong with investing in European ETFs!

If you want to be optimal, you must go with U.S. ETFs. Now, it could be difficult (or even impossible) to use these ETFs. Even for Swiss investors, few brokers let us access them. If you do not want to go the extra mile and want to invest in good ETFs with lower effort, European ETFs are great!

What matters most is investing, not investing optimally!

What about mutual funds?

In this article, I have talked very specifically about US ETFs, but what about funds?

US mutual funds are also great. But it is interesting to know that Swiss mutual funds can also save you dividends. Indeed, funds are very different from ETFs in how they are held.

With a fund, each investor goes indirectly. With an ETF, you go through a broker who holds the shares in your name.

This allows the fund to be more efficient directly depending on the treaty. So, a Swiss-domiciled mutual fund is as tax-efficient as a US-domiciled ETF. Of course, the Swiss mutual funds will likely have some other disadvantages (smaller and more expensive, mostly), but it is good to know that the main tax disadvantage of European ETFs is not present in Swiss mutual funds.

Conclusion

As you can see, there are many strong reasons to invest in U.S. ETFs instead of European ETFs! These ETFs will let you save a significant amount of money in fees and taxes.

80% of my portfolio is invested in Vanguard Total World (VT), a U.S. ETF. The rest is invested in a Swiss ETF for my home bias portion. So, I invest a considerable portion of my money into U.S. ETFs. This is because I consider these ETFs to be the best available for Swiss investors.

However, these ETFs are more difficult to use. Investors from the European Union cannot invest in them anymore, and in Switzerland, only a few brokers let you use them.

As I mentioned, U.S. ETFs are an optimization over European ETFs, but they are not a revolution. If you cannot (or do not want to) invest in U.S. ETFs, investing in European ETFs will be a great way to invest!

If you want to start trading U.S. ETFs, I recommend using Interactive Brokers. It is an excellent broker that lets you trade U.S. ETFs with very low transaction fees. I have a guide on investing with Interactive Brokers.

Are you investing in U.S. ETFs?

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Baptiste Wicht started thepoorswiss.com in 2017. He realized that he was falling into the trap of lifestyle inflation. He decided to cut his expenses and increase his income. This blog is relating his story and findings. Since 2019, he has been 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.

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178 thoughts on “What makes U.S. ETFs so great?”

  1. Hi Baptiste,

    Thank you for providing Swiss residents with such a useful platform!

    I am a US/Swiss citizen living in Switzerland and as I’m sure you’re aware, it’s quite a nightmare when it comes to investing. My girlfriend, however is an EU citizen living here as well and we will likely get married in the coming years and she has offered to let me invest with a brokerage such as IBKR under her name so that I can take advantage of Swiss capital gains benefits.

    Is she entitled to purchase US ETFs as an EU resident registered in Switzerland? If not do you think it is best to just play it safe and pay the US capital gains tax? I’m personally really mostly interested in long term index funds as I cannot open mutual funds in either the US or Switzerland.

    Thanks

    1. Hi Alex

      Yes, I have heard that many times from my readers, unfortunately. You could open an IB account yourself, right? But then you would be subject to capital gains tax, is that it?

      If she is in Switzerland, she will be able to use US ETFs on IB. As long as you trust her, I think it’s a good solution. If you want to be really sure, you could consult a tax lawyer to be sure this cannot be considered US tax evasion.

  2. Hi Baptiste,
    Great blog. Thank you for putting all this info together and available for us.

    What do you think about the impact of CHF getting stronger in future against dollars when we invest in US ETFs?

    Regards,
    Jack

    1. Hi Jack

      Thanks :)

      I think this is something Swiss investors simply have to live with. We will get lower returns than a USD portfolio because we need returns in CHF. But that’s alright. In the long term, we can probably expect to get something like 2-3 % less per year compared to a USD-only portfolio.

  3. Hey Baptiste

    As always, thanks for all you do on this great blog. I’ve managed to massively optimise my finances thanks to you.

    Quick question: is my understanding correct that unless I have 34’000 CHF in US-ETF’s there is no difference in terms of taxes on dividends when compared to an Irish-domiciled ETH, where there is also “only” a 15 % deduction?

    Thanks!

    1. Hi Dario,

      I am glad this is helpful :)

      34’000 is about right. The exact number depends on currency conversion and on dividend yield, but it is around this point indeed.

  4. U.S. ETFs are more tax-efficient.
    I was questioning myself if I still have an advantage from tax point of view in buying an US ETF rather than a UCITS (IE or LU based) one.
    If I understand I can claim this 15% on dividends in case I invest in a US ETF, however I have still to report the dividends in my tax declaration that will be taxed as income (so I will be subject still to a taxation that I can approximate to 15% or higher) (Canton ZH and City ZH, income > 140K CHF)
    is my reasoning correct?

    1. Yes, dividends are always taxed as income, this does not change between US and UCITS ETF. And the rate will different for each household.
      What changes is that for US dividends, you do not lose 15% of the dividends.

  5. Hi Baptiste,

    A huge thanks for taking the time to write all of this extremely helpful information. I have a few questions which I hope you don’t mind answering:

    1. If I want to invest, say, 100 fr. each month, does it still make sense to go with an option like IB, or does the flat fee mean that there are cheaper options available. (‘Cheaper’, in this case, being a relatively tiny difference.)

    2. Does a US-based service like IB offer any means of getting the tax report needed for the Swiss Steuererklärung?

    3. Aside from ETFs, does it still make sense to use IB for US-traded stocks (eg, Microsoft, Alphabet, Meta, etc.)?

    1. Hi Andrew

      1) With 100 CHF, it’s debatable. You will pay about 2.35 USD for the total fee to buy a US ETF. You could pay only 1 CHF at Neon Invest for instance, but then you cannot profit from US ETFs and good currency conversion for dividends. If you have a long term goal and think you can increase your contributions in the years to come, it makes sense to start with IB. Otherwise, use a cheaper one like Saxo or Neon Invest.
      2) You don’t need any specific tax report, only a statement with all information and IB does provide this.
      3) With IB, the conditions are the same for US stocks and US ETFs, so they are extremely affordable.

  6. Hi Baptiste,

    Great blog. The only source of detailed information (or nearly so) in the Swiss desert regarding financial information for everyone.

    Concerning the limit of limit of 100chf “If the non-recoverable foreign taxes (paragraph 8) do not exceed 100 francs in total, the credit is not granted.”, this is an important limit.

    I did a test in ICTAX, if I would have had circa 25000chf, so 300 VT ETF, the corresponding tax (Gross return minus VSt. into CHF) is 569chf. But they are the total, the withholding is the 15%, so 85.35. Not enough to receive the refund.

    Im informing to start investing but at moment I have no experience and maybe my number are wrong.
    So, How much must I have invested (circa and considering a positive year for returns) to be able to take advantage of the withholding tax?

    Thanks

    1. Hi Frank

      Thanks for your kind words.

      That’s a good point, I should emphasize this. With an average yield of 2%, you would need about 34000 CHF In VT to be eligible for the deduction.

      1. Hi!
        Do you have to buy 34000 CHF in VT in one go to get this deduction, or can I buy in portions over a few months? Thank you so much for a great blog.

      2. Hi Paulina

        You start getting the benefits from the tax deductions when you reach 34’000 CHF, but it does not matter if it takes you one month or 10 years to reach that point :)

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