What makes U.S. ETFs so great?

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What makes U.S. ETFs so great?

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 a few times about what makes them great in various articles. But since I still get many questions, I will now go into all the details of these U.S. ETFs.

I will not talk about Exchanged Traded Funds (ETFs) that invest in the United States. I am going to 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, let’s see 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 in the future either. So, for now, European investors are not able to invest in U.S. ETFs.

In theory, these laws are here to 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 in 2022 when the Swiss equivalent of the European laws enter 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.

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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 amount of fees you pay for holding the funds. This fee is expressed in percentage and is removed over the year from your money. 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. In fact, 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 into 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 the TER of 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 actually 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 a fund in Europe, the dividends will be withheld before reaching the fund. For instance, if you invest in an ETF from Ireland that has 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% percent of the entire world stock market. So, saving on the dividends of these stocks is very important.

After the U.S., the second-best domicile for ETFs 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!

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 generally 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 are using.

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, it cost me about 0.35 USD. I can buy a ton of shares and still pay less than a dollar for the transaction.

On the other hand, buying for 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 for 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 people believe that we should not invest in U.S. ETFs because of the U.S. Estate Tax. And in some cases, this is actually 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 inheritance of U.S. ETFs is subject to a 40% inheritance tax. And non-resident 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 the 40% tax.

This means that if you have many U.S. assets, they could lose a lot of value when you pass away, and your assets go through inheritance. It is not something you want to happen to your estate.

However, many people miss the fact that Switzerland has an estate tax treaty with the United States. And this treaty greatly increases the part that is 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. In fact, 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 will need to 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!

Conclusion

As you can see, there are many strong reasons to invest in U.S. ETFs instead of investing in 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 our money into U.S. ETFs. This is because I consider these ETFs to be the best available for Swiss investors.

However, the problem with these ETFs is that they 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 before, 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?

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.

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

  1. Great article Mr PS and very timely for me in fact.
    Myself a fan of US ETFs, the point i would be interested to get your view on is whether you waive the currency factor and invest in USD or go for hedged ETFs? I’ve lost significant value on some due to dollar devaluation…

  2. Just a question, for those who may end up back in the UK, are there US ETF tax or estate tax issues vs when resident in Switzerland?

  3. Quite a few advantages there with US ETFs. I did not invest in them cause i was concerned that i will not be able to invest in them after ’22; guess it was even rumored that it will stop at the end of ’20. And also the hassle with tax forms.

    What are your plans for the post ’22 time? Where will you invest in? Will you keep the US positions you already habe? Is there info by IB in how they will handle it?

    1. Hi Michael,

      If we knew for sure we could not use them after 2022, I would maybe not recommend them anymore. But since I still do not have a clear answer on that, I still recommend investing in them.
      The hassle with tax forms is really not that bad, at least in Fribourg, maybe other states are worse.

      If we can’t invest in them anymore in 2022, I will keep them and start investing in a portfolio of European ETFs at this stage. Normally, they should simply not let you buy more but you will be allowed to hold your positions and should not be forced to sell.

      Thanks for stopping by!

  4. Hi Mr. The Poor Swiss

    I am a 23 years old and i am really happy to have found your blog so early. I started investing regularly in VT monthly a few months back as my long term goal (and take advantage of compound interest as young as possible). Many thanks for all the information and knowledge you are providing.

    I maybe would add that the minimum commission of IBKR is CHF 10/monthly, CHF 120/yearly but yet another advantage for young people under 25 the minimum commission is only CHF 3/monthly, CHF 36/yearly.
    Of course this only applies if you haven’t invested CHF 100’000 like me ahah but i think you still have to take in consideration when you are a beginner like me 👍

    1. Hi The Young Swiss!

      Congratulations on starting to invest so early! I wish I started earlier :)

      That’s a good point, I actually forgot they had a price for people younger than 25. But the 10 CHF per month custody fee is mentioned in my review of IB. I see it as a nice goal to get to 100K :)

      Thanks for stopping by!

  5. I started investing with IB and buying VT at the beginning of this year. I was always a little fearful of the tax situation. I’d love to find a guide on how to claim the withholding tax but I’ve only found people talking about it but no real guide. Do you have any plans on writing a guide? Might be difficult since every canton has it’s own program but I’d be very grateful!

    1. Hi rollerstroller,

      I could make a guide with the Fribourg tool, but indeed it would be different from any other state.
      Now, the basics are the same. In each Swiss tax declaration, you will find a DA-1 form. And you can fill this DA-1 form for each of your U.S. ETFs in order to claim the dividends.
      It’s really easy, at least in Fribourg.

      I’ll think of writing an article on that to make it more step by step.

      Thanks for stopping by!

  6. Thanks for an interesting reading. Do you know whether for the matter of Switzerland-USA tax treaty the “Swiss investors” must be Swiss citizens or being a Swiss tax resident with an EU-country citizenship (ie without the Swiss citizenship) is sufficient?

    Dan

    1. Hi Dan,

      Good question.
      The original tax treaty says “a citizen of or domiciled in Switzerland”. So I believe that being a Swiss resident should be enough. But I am no lawyer, this is just my interpretation of this document.

  7. Great article – congrats!
    Do you know a good ETF search website for US ETFs?
    I am looking for something similar like justetf.com, but for US ETFs. Any suggestions?

    All the best

  8. Great post!

    I got a question about the currency risk between $ and CHF.
    Is it still worth it to invest in US ETFs while CHF increases in value compared to $?

    I had this discussion with my parents about investing in US ETFs and I couldn’t give an argument about why they should invest in US ETFs.

    1. Hi Kim,

      The point in this article is just about the efficient of U.S. ETFs compared to European ETFs, not about the difference in currency.
      Even if you invest in European ETFs, you will be likely to be exposed to the dollar. For instance, one of the most used European ETF VWRL invests in the whole world and holds USD. So investing in VT (U.S.) or VWRL (EU) makes no difference in USD exposure.
      You cannot avoid exposure to USD. Even if you buy Swiss stocks, they will do business in USD and you will be indirectly exposed to the dollar.

      Now, if you want more details about currency and how to protect against variations, I have an article about currency hedging.

  9. hi Mr Poor Swiss. Another great article, thank you. I have a question or two and I see this is not only my concern. Any chance you could write a detailed guideline how to do it (can be Fribourg).

    1/ The thing with deividends from US stocks or ETFs. How this exactly works (including how it works in Switzerland – is this deducted? treated as income?).

    2/ More important – how to fill in DA-1 form. I am based in Geneva and this scares me, my French is not so fluent. It is probably simple, but the document is very cryptic to me.

    3/ Third – if possible, and maybe you know. How to do the same (DA-1) for other countries? For example, there are 2-3 great stocks in countries such as Danemark or Norway, which I want to buy at good price. But each country has different agreement with Switzerland, so I do not know if DA-1 is enough for other countries? I think so, but the data there must be different, different % of base tax in these countries etc.

    I guess without points 2 and later 3 explaiend, I will ahve to get personal tax advisor (in case I buy more assets in US or in other countries)

    1. Hi hess,

      Since this has been requested many times, I will try to plan to do a guide on how to do it.

      1) Dividends are always taxed as income in Switzerland, regardless of where they come from.
      2) You have to declare the total dividends for each of your U.S. ETFs in the DA-1 form. You enter the total amount of dividends that you received for each of them. In the colonne about taxes that are not reclaimable, you put 0 and in the other column, you put 15% of the amount.
      3) You can use the same form for other countries. I believe it’s enough for each county, but I have never done it for other countries. Yes the percentage will be different in each case. And I can’t research each country to get the percentage.

      Thanks for stopping by!

      1. Thank you. I think it would be very useful to have an article, with screenshots how to fill in DA-1 form etc. ANd it doesnt matter if this is Fribourg or not :) I will investigate it deeper when I have to declare my dividends next year, so far my portfolio is small. But next year for sure there will be some dividends and I would love to learn it once for good (it is probably very simple..)

  10. Hi Mr. Poor Swiss,

    Thanks for this post! When I was reading some of your previous posts I was always wondering why the US ETFs are better than the EU ones. Now it’s clear.

    I’m living in Switzerland since some years ago and your blog is incredibly useful, thank you very much for writing it in English. I am not very familiar yet with how taxation works here, so the bits of information about tax deduction are always welcome!

  11. Hi poor Swiss, excellent article as usual!thanks a lot for sharing your knowledge with all of us :)
    I am really interested in your experience in term of profitability in short term (3/4years) vs long term (15/20years) with U.S ETF investing with a clear majority(80%) in Vanguard Total World (VT) as in our case we would like to buy a house here in Switzerland as a primary residency and we are scared about investing our rather scarce savings using this investing strategy just for the next 3-4 years due to the volatility of the markets during the pandemic as we will need the money in cash to make the deposit for a mortgage in addition to the pillar 2.What is your approach on that point, is it too risky on the short term? What is a standard profitability / potential loss that we need to keep in mind? Thanks in advance !

    1. Hi,

      It’s likely too risky for the short-term. You can do several things:
      * Only invest a small part of your savings.
      * Be flexible on when you can buy: This could make it earlier or later based of the market

      But simply going 100% in stocks if you know you want to cash in 3-4 years is not a good idea, you need an exit plan.

      I think the best solution is to be flexible, if you can afford to wait and will not sell at a loss.

    1. Hi,

      Indeed, these ETFs are the good second-best choice after U.S. ETFs.
      Keep in mind that the ETFs themselves are not free, only the transaction costs at DEGIRO, you still pay the TER of the ETFs themselves.

      Thanks for stopping by!

  12. Thanks for such an informative article!

    Do you need to be a current Swiss resident to set up an account (operating in Switzerland) with Interactive Brokers?

    1. IB does not operate in Switzerland. What differentiates the accounts is the residency. So, yes, you would have to have an actual address in Switzerland, to be able to trade U.S. ETFs.

      Thanks for stopping by!

  13. Hello, thanks for your precious contributions to finance knoledge and FIRE for Swiss residents!
    What do you mean when you say that you can reclaim the (30-15 tax treaty) 15% tax on US dividends?
    Does the Swiss Tax Authority consider it a deduction towards your taxable income, or do they deduct the entire 15% sum from your tax bill?

  14. I forgot the other question.
    If I understood correctly, on US domiciled ETFs there is no withholding tax when the dividends are paid from the underlying assents (the shares) to the ETF. The withholding tax applies only when the dividends are paid from the ETF to the investor (30% minus 15% thanks to tax treaty US-CH).
    Would this imply that on ETFs Accumulation there is zero withholding tax, because the ETF never pays to the investor but reinvest in the fund?
    Of course, even though the dividends are reinvested and never paid to me, as Swiss resident I must declare the amounts of those automatically reinvested dividends and pay income tax on them. Is this correct?
    Thanks much in advcance.

    1. Hi Steel,

      That is not entirely correct, no.
      The withholding tax is taxed when the dividends are leaving. For U.S. domiciled ETFs, this happens when dividends are distributed from the ETF to the investor. So, you are right with this part. For European funds, this happens when the dividends reach the ETF. So, if you use a European ETF, you will never this 15% (Ireland ETFs) of dividends, they will be lost before you receive any dividends on your side.
      And there are no Accumulating ETFs in the USA, so this is not a way to save money on the U.S. dividend withholding.

      1. Thanks for your replies!
        So, for a Swiss investor, the best choice is US domiciled ETF because 15% withholding tax (30%-15% tax treaty) is applied on dividends from the ETF fund to the investor and can be used as deduction in your tax declaration. While if you use EU domiciled ETFs (Ireland), there is a 15% withholding tax applied on dividends from the Stocks to the ETF fund and it’s impossible to use it as deduction on tax declaration.
        Is everything correct?
        The above relates to US equities in US domiciled ETFs. What about withholding tax on other equities (European or Asian stocks) that are in the same ETF US domiciled?
        Thanks again.

        1. Hi Steel,

          Yes, that’s correct.
          There may be differences in other equities as well in different countries. The reason we are focusing on U.S. Dividends is that U.S. stocks make up for more than 40% of the world stock market. So, they are the most important to optimize.

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