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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Great article.
Regarding the dividend taxes on US etfs which are reducced to 15% upon filling in the W8 form, is this 15% paid directly by IBKR to swiss yax authorities? And if you can claim it back, does this mean that you pay 0% dividend taxes in Switzerland? Or you can claim it back because you declare the dividents as part of your annual income, which is then taxed at the income bracket you are assigned, which could be more than 15%?
What happens if you don’t usually fill in a tax form (E.g. job contract with income tax witheld at source).
Hi Corinne
This 15% is paid by IB to US authorities, not to Swiss authorities. You declare the dividends at income, which can be taxed at more than 15%. However, the 15% count towards already paid taxes.
In the end, you still pay taxes on dividends, as income. But the withholding is limited.
Hello,
Thank you for your very interesting article.
The informations mentionned in you article also applies to a permis C citizen?
Thank you very much
Hi Ric,
The information should apply to everybody that fills a full tax declaration in Switzerland.
Hello, thank you very much.
I don’t know why but your answer didn’t appear on my phone. You can erase my previous comment about the bump thing.
Thank you and have a nice day
Unfortunately, this happens from time to time. This is an issue with the Cloudflare cache not properly purging on comments. Sorry about that!
Hi, great blog!
I’m Living in Portugal and I was thinking of opening an account with IBKR in order to buy ETF’s from the US, mainly I was thinking of investing in ETF’s that give a pretty good return, so they are considered Fix income investments, after having read your blog I get that I will not be able to buy those ETF’s from the US through IBKR since I am living in Portugal, so my questios is:
“Is it impossible for Europeans to open an account with a broker from the US so we can have access to all those ETF’s from the US?”
I do not want to invest in European ETFs, I’m only interested in investing in US ETF’s, so is there any way that someone living in Europe can buy ETF’s from the US?
Thanks in advance!
Hi Alex,
Yes, it’s impossible for an EU resident to buy US ETFs directly with a broker. Brokers should not go against EU regulations, however stupid they are. Now, it’s not impossible that some US brokers will still let you buy them.
There is a way. You can buy options on these ETFs, exercise the option, and then you get the shares. However, you will have to buy 100 shares at the same time.
Salut et merci pour l’article.
Peux-tu me dire comment se passe la taxation sur le gain en capital avec les ETF américains ? En effet, en Suisse on ne paie pas d’impôts sur le gain en capital, mais il me semble qu’aux US oui.
Merci d’avance
Hi Mikael,
Please comment in English on English articles. You can comment in French on the French translation.
The place that matters is where you pay taxes. So, if you pay taxes in Switzerland and have US ETFs, you will still not pay capital gains (unless you are a professional investor).
Hello,
First of all rhanks for the article, it is very useful.
In case I buy an ETF based in Ireland that is „ACC“, would it be better in terms of dividends taxation? Because I would not receive the dividends, am I right?
Thank you!
No, it would not if you are in Switzerland. In Switzerland, accumulated dividends are taxed the same way as distributed dividends.
In any other country, you will need to get information about the local taxes system.
Thanks a lot for your feedback!
Hi,
Thank you for your great blog!! What about the USDCHF exchange risk? Since 2008, the dollar depreciated of 16% from ChF (a loss of 1.23% per year). Swiss guys are particularly exposed to the risk of appreciation of the Swiss franc (as compared to USD and, even worse, EUR)… especially when investing in long term runs (which is the main strategy for FIRE). The Federal Reserve is now (hugely) printing USD to cope with COVID. This also may depreciate the USD value in middle term. What are your thoughts?
Hi dc,
Over the long-term, I believe most of these effects can be ignored.
Since 2008, the US stock market returned more than 12% annually. If we were not investing in US stocks for fear of exchange risk, we would lose a lot of money. And hedging the risk will cost more over the long-term.
Hey Poor Swiss
Quick question on the choice of ETF, when I compare the iShares (URTH) to the Vanguard (VT) the performance over the last few years the iShares is mostly between 1-5% better. In the end, isn’t it better to invest in it even if the cost (TER) is higher? Or what speaks from your point of view for the Vanguard?
Thanks for the short reply.
Kind regards
Franz
Hi Franz,
It’s very difficult to compare these two funds since they do not invest in the same thing. VT invests in the entire world. URTH only invests in developed countries.
Now, it’s indeed possible that developed countries perform better than emerging countries. But if that changes in the future, VT will have you covered with higher diversification.
But many people invest solely in developed countries and will be pretty fine. It’s just a matter of how much diversification you want.
Hello Poor Swiss
Yes, you are completely right, I looked twice wrong :S. Once the two wrong ETFs compared and then still in the wrong column for the performance looked. The two Total World ETFs from MSCI or Vanguard are identical in terms of performance, which is also logical :D. Thanks for your help anyway!
Kind regards,
Franz
Hello!
How could I apply for the 15% withholding tax reduction from dividends in Interactive Brokers? Is it simply stating that I qualify for the benefits of US income tax treaty?
Will they then automatically not charge 30% withholding tax but only 15%?
Hi Victor,
I explain how to do this in my article about creating an IB account.
Then, they will automatically start withholding only 15% and not 30%.
Just one query re Interactive Brokers. How hard is it to get the relevant documents needed for our tax return here in Switzerland? We are living here and tax resident.
Hi Irene,
It’s really not hard. I am sending the annual statement to my local tax office and they have never complained.
Hi!
Thank you so much for sharing!
> However, this may change in 2022 when the Swiss equivalent of the European laws enter into effect.
Would you mind sharing your source for this? Do you have plan for you portfolio if this change happens?
Thank you,
Larry
Hi Larry,
I have an article about that. Currently, the consensus seems to be that nothing will change in 2022, but I am no lawyer.
If that happens, I will probably switch to ETFs from Ireland. But I am not entirely set on that.