Dividend Tax Leakage, Differences In Funds Tracking The Same Index…Index Investing In Europe Is NOT Easy!

We were almost ready to take the plunge and put a lot of dough into the Vanguard All-World ETF at a 0.25% TER…when I started investigating the dividend leakage. I was triggered by Meesman’s article. This thing causes some serious damage to your investments placed outside of your home country. This is because the other country’s government charges a very scary thing called dividend tax. It’s illegal, it’s unfair and it’s a financial independence killer. Just read this. Yikes!

This dividend tax leakage especially hurts ETFs and index funds. This leads to an unrecoverable tracking error between the fund and its index benchmark! These European investment vehicles underperform their benchmarks by 50 to 150 basis points per year. That’s a significant cost for investors! According to the fore mentioned article the extent of tax leakage varies widely by index type. However, tax leakage represents a GREATER COST to investors than expense ratios! This is the worst possible outcome…obviously.

As Vanguard is domiciled in Ireland a Dutch investor (or any European investor not from Ireland) is charged dividend tax by the Irish government. Whereas the Irish investor can claim this dividend tax back from the government, the rest of us Europeans can’t. And we can’t claim anything on our own government either. We don’t even get to see the real dividend. We’ll receive 85% of the total dividend, and that’s that. The Irish government will already have taken its (NOT so fair) share. That comes down to adding 0.4%-0.6% to your TER. So our Vanguard All World ETF would intrinsically cost 0.65%-0.85% instead of the 0.25% we were promised. 😦

Yeah, it’s illegal and unfair. The EU already stated in 2004 that dividend tax on individuals doesn’t comply with the EU treaty. The European Commission has already told all member states to stop this unfair practice. Even the European Court of Justice ruled that member states didn’t comply with the treaty multiple times, for example in this case against the UK in 2012. Multinationals have been fighting this injustice through the ECJ for almost a decade now. Every time the ECJ rules in their favour…but there’s not one member state that complies! They will lose millions in tax income. Experts think the turning point is almost there……but should we believe these fortune tellers?

Lo and behold, there’s a solution! A smart Dutch broker decided to act and created its very own FBI (Fiscale Beleggingsinstelling, it’s this fiscal arrangement so that the funds can now be domiciled in The Netherlands) in 2010.  This year Meesman switched its Global Fund from Vanguard to accommodate it with Northern Trust making it the first MSCI World Index Fund without dividend tax leakage. This could make up for an extra 0.4 to 0.5 going to the investor per year. Yay! Problem solved! Let’s invest with ThinkCapital or Meesman! Whoohooo!

Hold your horses! Let’s get back to that MSCI World Index, now shall we? You’d think that any fund tracking that same index would have the same results, right? WRONG!

This shows the 2012 results for a couple of index funds and ETFs that track the same MSCI World index.

I nicked this graph from Ms. Verdegaal’s article which explains the situation in Dutch. She got it from Morningstar and Meesman.

A 3% difference between the best and worst performing fund! WTF?! This means you have to study all fund prospectuses. What are the costs? Is it expensive to get in and out? Who receives the dividend? How precisely does the tracker follow the index? Are you really buying stocks or just renting them? Do they rent out your stocks? If so, do you get paid rent for that service? This means you have to compare results yourself, for example, via Morningstar but that ain’t easy. Sigh!

It gets worse. I have already explained the transaction costs with Meesman will get ridiculous as soon as you want to invest or extract bigger amounts (€2.000+) and they don’t have a limit like BinckBank. However, the husband needs to calculate whether their solution to the dividend tax leakage makes up for that. Now, it’s difficult to compare because they used to invest with Vanguard (and performed really well, according to the graph!) but now with Northern Trust (I haven’t been able to find their performance in 2012 and compare that, if there’s a reader that does…?). With Vanguard they used to follow the MSCI Index very closely and you’d own a mix of all 1600 or so stocks in it. Which is what you’re after.
Okay, let’s look at ThinkCapital as well then. No dividend tax leakage either. Happy, happy, joy, joy! Oh, goody, they offer the Think Global Equity UCITS ETF and charge only 0.2% TER! Yes, yes, yes! Click! I want to get me some MSCI World Index funds without the dividend tax leakage, thank you! Since it’s in Dutch I’ll sort of translate….the Think Global Equity UCITS ETF is spread into 250 world-wide stocks and tracks the Think Global Equity Index. Eh? The results of this ETF can be COMPARED to the results of the MSCI World Index. Huh? What happened to the 1600+ stocks thingy? Where’s the diversification? Son of a ………! Oh, their own benchmark (which is NOT the MSCI World Index) in 2012 was 14.24% and their actual result was 13.59%.
Geographically you’d be investing in the U.S. (38.32%), Japan (18.56%), France (7.2%), the U.K. (7.26%), Germany (6.26%), Switzerland (4.15%), Australia (3.03%) and a bunch of other developed countries.
A huge difference with the Vanguard MSCI World Index where you’d be investing in the U.S. (53.61%), Canada (4.22%), the U.K. (9.12%), Western Europe “Euro” (12.09%), Western Europe “Non-Euro” (6.17%), Japan (9.25%) and a bit of other countries. No emerging either.
To me it looks like they’re fiddling around with their own benchmark and I have no idea whether this will turn out for the best. Tracking the complete MSCI World Index feels a lot better.
The other ETFs they offer we do not find interesting at all.

So, what’s a girl to do? Stick with Meesman and pray for the best? Dive into Vanguard and pray that member states will give up their sadistic dividend tax habits? Take a gamble and go for ThinkCapital?

Aaaaaaaarrrrrrrrgggggggghhhhhhhh! INDEX INVESTING IN EUROPE IS NOT EASY, I DON’T CARE WHO YOU ARE, IT JUST AIN’T!

Let’s move to the U.S. and invest with Vanguard directly! Yeah! 😉

Okay, stop being such a complainypants and look at the bright side. At least now you now more of what you’d be buying. Plus, you’re still much better off than investing with a managed fund because you’d still be way under 1% TER.

If you Dutchies are interested in a dividend tax leakage discussion, this is a good place to start. I will phone our tax services about our treaty with Ireland and the double taxation that now occurs. Ireland takes 15% and dividend is taxed 30% in The Netherlands. I’ll keep on investigating this very important matter…

What would you advise us to do? Anybody? Somebody?

Love,

Mrs EconoWiser

Disclaimer: I am not a professional investor nor do I claim to be one. You are solely responsible for your own financial and investment choices. I am not responsible for inaccurate information in any of my blog post. I am merely sharing ideas and findings of my very amateurish investigation in index investing.

How To Think About Debt

I totally nicked this suggestion from jlcollinsnh’s blog post (I’m reading the stock series over and over again!) on how to think about money, who in turn was given the link by Shilpan. As it was added at a later stage and I really enjoyed this Ted Talk (Ted is cool!) I thought it wouldn’t hurt to also give this viewing suggestion.

Have fun!

Mrs EconoWiser

Paycheck Delay

Yesterday, on the 26th of the month, I still hadn’t received my paycheck. I wasn’t worried, because I have more than enough ‘stash to cover the delay. Apparently, the bank responsible for all salary transactions messed up big time. Usually, employees will receive their money on the 24th or 25th at the latest. An email was sent explaining about the bank’s stupidity and a statement was made that we’d receive our paycheck asap. That afternoon I received my paycheck.

This event didn’t worry me for a second. However, I can imagine that people who always have a shortage at the end of each month were kind of worried. I would hate that feeling and situation. I am so glad I discovered the path of frugality and saving.

How about you?

Love,

Mrs EconoWiser

Bad News In The Endowment Department: Another Lesson Learned

So, I contacted the real estate agent in Hungary. They’re not even going to try and sell my house there…because there’s currently no market for it anyway. The housing market totally crashed there. So I guess I am stuck with an unsellable house in Hungary and no endowment to invest in index funds.

Oh well…I never included that house in my net worth anyway.

What can I learn from this? Well, my parents bought me this house at the end of the Hungarian housing boom. Apparently, the market soared from 1998 to 2007 and house prices increased 264%. They bought the house in 2005, almost at the height of the market. They were lured into investing in the Hungarian housing market because many investors before them made huge profits. My parents thought they were buying their kids (my brother also has a house there) a good investment for the future. With hindsight it’s kind of obvious they should not have bought at that moment. But….that would be timing the market and that’s always very easy when looking back.

My lessons learned here:

• If an investing opportunity sounds too good to be true…it probably is too good to be true.
• Research, research, research!
• Don’t buy stuff you don’t know anything about
• If everybody else has already made a fortune…you’re too freakin’ late to join the party!
• Don’t buy stuff that requires communicating through a foreign language…this causes so much extra costs. Everything my parents want to get done (bills, utilities, maintenance) costs them money, because they don’t speak Hungarian.
• Invest in REITs instead of becoming a landlord, I don’t want all the fuss. I’m still looking for a nice fund to invest in, since Vanguard doesn’t offer such funds here in Europe.

What would you do? Sell both houses at a great loss or keep them for a while and wait for the Hungarian housing market to rise again?

Love,

Mrs EconoWiser

How Can Pat The Rat Escape The Rat Race?

Somebody gave me this book and office gadget thing called “Welcome to the RAT RACE”. Obviously, I was interested. Against all my minimalistic beliefs I brought this piece of extra clutter home. There was a foam board and wind-up rat with a little booklet titled “Fighting the corporate treadmill”. Ah, a way to get out of the rat race, I naively thought.

You can get this for a dollar…But don’t buy it! Here’s my review and an escape plan for our friend: Pat the Rat.

See, the booklet was really depressing. The story sort of goes like this: Pat is in this cycle of traffic, deadlines, sleep (or lack thereof) and meetings working as a Generic Rodent Data Entry Telemarketing Assistant. He follows the rules of the rat race. Whenever you feel as depressed as Pat, you can wind him up and watch him run his circles for a couple of seconds and then go back to your daily grind in the rat race while suffering the same fate. Then, there are a couple of pieces of advice for Pat (and you!) in order to make these cycles more bearable. All Pat wants is to make The Big Cheese Happy. So he uses his two-hour commute to catch up on business calls and what not in order to efficiently use this lost time. Even though Pat hates meetings he sees the benefits of free coffee and donuts. Pat always meets his deadlines and will therefore get a promotion before Lazy Louise. Pat doesn’t get enough sleep, and he should work on that. Pat dresses for success, which means he wears the same uniform suit every single day. He might take a break every now and then, but always plans these breaks around work so that his work doesn’t suffer. Pat is cautious in the office kitchen in order to avoid any gossip about him. He goes out of his way to please The Big Cheese and tries hard not to take criticism personally. He’s also aware of coworkers who might steal his great ideas and he’s careful not to lose his superficial friendship with his office mates even though some of their habits drive him nuts. All the while he’s buying more stuff, hasn’t got a social life nor a spouse because he’s too damn busy working. In conclusion: the rat race isn’t easy, but you can always turn to Pat for some commiseration and a reminder that you’re not alone. And this is supposed to be a kit for “helping you survive the corporate rat race” according to the makers.

SURVIVE??? After reading this and watching Pat run around his cycles the only thing you want to do is kill yourself?!!! The message is to become a better rat….well, I don’t want to be a rat caught in the rat race!

Hence, my alternative route for our poor Pat the depressed and extremely unhappy Rat:

Here’s my alternative in close-up for Pat the Rat:

Love,

Mrs EconoWiser

€1700 a year saved on childcare

Yesterday we talked to our neighbour who is going to look after our kid for a day a week. From the end of August 2014 I’ll start working three days a week instead of four for a whole academic year. The plan is as follows:

Monday: Mrs EconoWiser
Tuesday: Husband’s parents
Wednesday: Neighbour
Thursday: Mrs Econowiser
Friday: Husband

My parents were not able to look after the kid during weekdays after all. They’re entrepreneurs and for my mother to come in and look after the kid for a day would mean they would have to hire an extra employee for that day. But they have offered to look after the kid during evenings/nights and weekends if and when we’re interested.

This means that we only have to pay (the husband’s parents don’t want to get paid, obviously we will give them other things to show our appreciation like taking them out for dinner every once in a while or something else they like) for childcare one day a week.

The cost comparison with a daycare centre is huge. Our daycare charges a monthly membership fee of €310. As I don’t work during all school holidays, we would still have to pay for those days. So that’s 12 weeks a year extra, whereas we only need 40 weeks a year. A daycare centre would cost €3720 a year. In The Netherlands childcare is subsidized, which means that the government will repay a certain percentage and that depends on your income. However, our combined income is way too high for this subsidy, so we’d be paying the full price.

Our neighbour charges €5 an hour and food is included. She’ll look after the kid for 10 hours a day so this will cost us €50 a week. She won’t look after it during all school holidays, which means we’ll pay for her services for 40 weeks a year and that comes to a total of €2000 a year.

I still don’t have a clue about how I’ll feel about working and leaving the kid with other people…we’ll see. For now, it looks like we have a sound plan.

Love,

Mrs EconoWiser

Asset Allocation Net Worth

According to jlcollinsnh we can totally add our home equity into our net worth asset allocation overview. So, I’ve been playing around with our asset allocation based on the numbers by the first of November 2013. The equity in our home is based on what we already paid off, so I am not working with whatever our house should be worth right now.

These are the numbers:

Cash: 21%
Home equity: 74%
Investments 5%

Obviously, I’ll need to create an overview of our asset allocation in terms of investments only as well. This is our net worth asset allocation, not our investment portfolio asset allocation. I’ll do that on 1 December. However, this overview shows (again) that we have too much ‘stash laying around and we should invest a huge chunk of it.

What does your net worth asset allocation look like?

Love,

Mrs EconoWiser

A Third Option

We have thought of a third option for investing, thanks to a comment made by Rational Dutch in the two investment options blog post earlier this week.

Option 3: invest a bigger amount of money every quarter

We could invest a bigger amount of money (it’s big money for us) every quarter with BinckBank. Right after dividends are paid out we could fill up our account to (for example) €5000 and thus reinvest the dividends plus invest a huge chunk of cash. This would cost €11.50 (€6.50+0.1%) in transaction fees. We would only be buying All-World ETFs, since we’re in the wealth building stage. We can’t buy Vanguard bond funds through BinckBank (yet?) anyway. We could still buy bonds with Meesman or SNS Fundcoach at 0.5% transaction fee and 0.3% TER, if we’re interested.

We’ll look at all three options this weekend. Is there a fourth option to consider?

Love,

Mrs EconoWiser

One In Three Does Not Have An Emergency Fund

According to this Dutch article one in three fellow Dutch(wo)men do not have an emergency fund! About another third does not have a sufficient emergency fund, which means the amount is lower than €3500. Only 21% of the Dutch have an emergency fund that exceeds €5000.

I find this shocking. A lot of people would not be able to make ends meet for one month if for one reason or another they wouldn’t receive a paycheck that month.

Our minimum emergency fund would cover us for about six months, we’d probably stretch every euro and make it last for eight to nine months. Right now our total ‘stash would cover our expenses for a year and a half, maybe even two. We think that’s way too much and we’re thinking about investing the surplus. Well, if you’ve been reading this blog you know all about it. The husband is going to calculate our different options.

How long would your emergency fund cover your expenses?

Love,

Mrs EconoWiser

Investing: Choice Between Two Options

Today I made a phone call to BinckBank and it seems all the things I found out during my research are correct. Conclusion: a broker specialized in index investments, like Meesman in The Netherlands, is ideal for people who want to invest smaller amounts of money on a monthly basis. However, you need a “normal broker” (and the cheapest one at that! in The Netherlands this is BinckBank) if you have bigger amounts of money to spend.

We now have a lot of cash on top of our emergency fund just sitting in a savings account against less than 2% interest, it’s getting ridiculous. We have narrowed our investment options down to two.

Option 1: increase our monthly investments

In order to spread our investments we could go from investing €600 a month to €1300. The husband thought €700 extra from the endowment is a nice number. Transaction fee is 0.5% so this would cost us €6.50 a month. It will take years and years for the endowment to finally be invested in the stock market this way. Also, each month we have at least €1.000+ of our income that we didn’t spend…so I guess we’re hardly going to touch the endowment anyway. I don’t know whether this statement will hold true when the kid arrives ;-).
On top of the transaction fees there are ongoing fees of 0.5% on average a year. Fortunately, Meesman managed to solve the tax dividend leak for the Dutch…so this might come down to almost nothing for the world-wide funds. However, we also have emerging markets and bonds.
Another great advantage of this option is that dividends are reinvested in the fund automatically. That’s great, so we don’t have to worry about anything.

Option 2: don’t fret and just dump bigger amounts into the stock market in one go!

This is the scariest version….(sorry jlcollinsnh, it does scare the hell out of us, guess that’s what makes us human? 😉 We know it’s about time in the market, not timing the market…but the stocks are at an all time goddamn high!) If we were to invest €10.000 in one go (there’s more to invest than that, but you know I am hesitant with stating the actual numbers) that would cost €16.50 in transaction fees. The ongoing fees for the Vanguard all market fund are only 0.25%. However, since the fund is based in Ireland there’s no tax advantage for the Dutch here.
The disadvantage here is that dividends are not reinvested automatically, but paid out every quarter. If we would receive €100 in dividends it would cost €10 in transaction fees to reinvest that in the same fund and thus only investing €90. Yikes! We could always transfer that amount to Meesman and invest that amount against €0.50 transaction fees and invest €99.50. I guess it would take a long time for the lower ongoing fees at BinckBank to make up for that loss?

The tipping point for option number 2 is roughly around €2000. Investing that amount would cost the BinckBank minimum of €10 in transaction fees (€6.50+0.10%). Investing €2000 with Meesman will also cost €10 in transaction fees (0.5%). For example, investing €3000 with Binck would also cost €10. But that same amount with Meesman would cost €15.

What would you do? A bear market would come in quite handy right now…

Love,

Mrs EconoWiser

Disclaimer: I am not a professional investor, nor do I claim to be an investment advisor. You are solely responsible for your own investment choices.