US ETFs are the best ETFs for Swiss investors
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I mostly invest in US ETFs, and I have recommended these ETFs many times on this blog. I consider US 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 US 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 US ETFs great.
Availability of US ETFs
First, we need to address the issue of the availability of US 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 US ETFs.
In fact, in 2018, all the countries part of the European Union lost access to US 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, US fund providers have not provided them, and they are unlikely to do it. So, for now, European investors cannot invest in US ETFs.
In theory, these laws protect investors by providing 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 US 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 provides us with 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 US ETFs.
US ETFs have lower fees
The first advantage of US 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 US ETF (VOO) has a TER of 0.03%, while the European ETF (VUSA) has a TER of 0.07%, twice as expensive
- Vanguard World: The US 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 US ETF (IVV) has a TER of 0.03%, while the European ETF (IUSA) has a TER of 0.07%, twice as expensive
- iShares World: The US ETF (URTH) has a TER of 0.24%, while the European ETF (IWRD) has a TER of 0.50%, twice as expensive
As you can see, the TER of European funds is significantly higher than US 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.
US 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, US ETFs are more tax-efficient for Swiss investors.
This tax efficiency is based on the way dividends are taxed. Especially how the US taxes dividends of US companies.
By default, the US government will tax 30% of the dividends emitted by US companies to foreign investors. Now, Switzerland has a tax treaty that reduces this withholding to 15% for Swiss investors, the same amount withheld for US investors. And moreover, 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 US fund, there is no loss!
This advantage is essential since US 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 US is Ireland. So, if you do not have access to US 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 US 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 critical to know that this deduction can only be claimed when it reaches 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.
If you are wondering whether this is significant, you can take a look at the following graph. In this example, we are investing 1000 CHF per month over 25 years and the only difference is that we lose 15% of the dividends with
US ETFs are larger
A small advantage is that US 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:
- It shows more popularity. Larger funds are generally large because they are very popular (people put their money in them).
- It has a lower chance of being closed.
- 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.
- 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.
US ETFs are cheaper to trade
The last advantage is that US 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 US ETFs.
And European ETFs are about in the middle of Swiss ETFs and US ETFs. To my knowledge, US 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.
Risks: What about the US Estate Tax?
Many believe we should not invest in US ETFs because of the US Estate Tax. And in some cases, this is true. But in practice, for Swiss investors, there is almost no extra risk in investing in US ETFs.
The US estate tax law states that the inheritance of US ETFs is subject to a 40% inheritance tax. Nonresident aliens (basically, foreigners outside 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 US 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 US estate tax for up to 11.18 million dollars, prorated to the proportion of US assets in your net worth. For instance, if US ETFs represent 10% of your estate, 1.118 million dollars (10% * 11.18 million) will be exempted from US Estate Tax!
So, in most cases, Swiss investors do not have to worry about the US estate tax! However, it is true that it may complicate your estate. If you have US ETFs, you will need to deal with the IRS.
If you want all the details and many more examples, you can read my in-depth article about the US Estate Tax law. This article also explains how to deal with US estate tax, in the specific case of Interactive Brokers.
What if you cannot use US ETFs?
Unfortunately, many people do not have access to these great US ETFs.
For these people, investing in European ETFs is still an excellent option. Using US 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 US 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
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As you can see, there are many strong reasons to invest in US 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 US ETF. The rest is invested in a Swiss ETF for my home bias portion. So, I invest a considerable portion of my money into US 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, US ETFs are an optimization over European ETFs, but they are not a revolution. If you cannot (or do not want to) invest in US ETFs, investing in European ETFs will be a great way to invest!
If you want to start trading US ETFs, I recommend using Interactive Brokers. It is an excellent broker that lets you trade US ETFs with very low transaction fees. I have a guide on investing with Interactive Brokers.
Are you investing in US ETFs?
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Hi,
Thanks for the article.
Is the tax advantage you are describing here for ETFs applicable to US stocks as well?
Hi,
Not really. If you buy U.S. stocks, you will get 15% withheld, against 35% withheld for Swiss stocks for instance. But the taxes will be the same.
The main point is that the dividends withholding of U.S. stocks when using a non-US ETF are lost. But holding a US ETF lets you reclaim them.
Hello Benjamin,
Therefore you cannot reclaim the tax (15%) on single US stocks? How about EU stocks that give dividends? I assume it also depends on the broker, as long as the broker has a tax return file, I guess you can reclaim also the single stocks( USA, EU)?
Thank you for your input, very good information as always :)
(Baptiste, not Benjamin :)
Yes, you can reclaim 15% on US stocks on your tax return with DA-1, same as US ETFs.
For EU stocks, it will depend on the country of each stock, not really on the broker. But I am not familiar with the specifics.
Hi poor Swiss,
Great article! It is very helpful to save taxes on replicating ETFs. However, is there not an less complicated way? Why do you not invest in synthetic ETFs?
Hi Stefan,
I don’t understand what’s complicated about U.S. ETFs? It’s the same effort to invest in U.S. ETFs as in EU ETFs.
I don’t invest in synthetic ETFs because they are artificial, I want an ETF that actually holds the shares directly.
Hi, do you need to file US tax return as a non-resident alien to claim the 15% tax treaty difference? How complicated is doing that from Switzerland?
P.S.: Thanks for your informative blog! I’m currently living in US and consider moving to Switzerland and I use your blog as a source of information. I’m actually wondering if I can keep my current US ETFs at IBKR without having to make any changes. (I’ll become an NRA after moving.)
Hi,
It’s not that complicated and you do not have to file US tax, fortunately. I have an article on how to do it for U.S. ETFs.
I believe you should be able to keep your ETFs. However, you may have to change your IB account from the US to the UK and I do not know if it’s possible easily or you have to create a new account and then do a transfer. You will have to ask IB about that.
Thonas guys here
https://www.cash.ch/news/top-news/passives-anlegen-bei-der-etf-wahl-ist-das-domizil-entscheidend-1343757
write that Ireland base ETFs are more tax efficient or did they not took US ETFs into account?
Hi Thomas,
I do not read German but I think they simply did not take U.S. ETFs into account since they are not available with each broker.
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.
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.
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.
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.
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?
Hi Steel,
It’s considered towards taxes already paid. So, this should reduce the amount of taxes you are paying in Switzerland.
This is to avoid double taxation on this money.
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?
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!
Hi The Poor Swiss
Great articel thanks!
As we known, VT ETF is not available at Degiro.
However 200 ETF are free of charge at Degiro.
This would be very cost effective for investments under 100k after all.
Overview:
https://www.degiro.ch/data/pdf/ch-de/Kostenfreie_ETFs.pdf
What do you think?
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!
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 !
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.
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!
Hi,
I am glad this is clearer now :) I should have written that earlier.
Let me know if something else is not clear enough.