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 posts. I am merely sharing ideas and findings of my very amateurish investigation on index investing.
How to index invest with Vanguard in dollars?
This is actually the easy part. You need to find the best broker that fits your requirements who is specialized in international investing. That usually means the broker with the lowest fees. You need to compare these fees, for example like this:
|
BinckBank |
Lynx |
Interactive Brokers |
| Costs converting euros into dollars transaction fees |
€ 0.2% of total amount |
$4 |
$4 |
| Costs of placing an order in dollars |
€9.50 + 0.15% of total amount |
$5 |
$5 |
| Total cost for buying €3,000 worth of Vanguard Total Stock Market ETFs |
€20 (€6+€9.50+€4.5) |
$9 (+/- €6.50) |
$9 (+/- €6.50) |
So, then it’s a matter of adding a lot of euros onto your account with the broker of your choice. You convert your euros into dollars and you buy whatever index fund you’re interested in. Your broker will take you through the steps you need to take during a phone call. Seriously, this is not the scary part. Keep on reading.
It gets a bit scarier when thinking about the differences between these brokers. BinckBank is a Dutch company and your stocks are held in your name with a Dutch custodian. So in case BinckBank goes bankrupt, it will be rather easy to reclaim your stocks and accommodate them with a different broker. Your stocks with Lynx and Interactive Brokers are not held in your name. They’re traceable, obviously. However Lynx has a French custodian and Interactive Brokers an American custodian. I can imagine it being a tad more difficult to retrieve your stocks with those custodians. Still…they’re protected up to €500,000.
As always, it’s your choice.
How to reclaim withholding tax and avoid double taxation aka dividend leakage?
Yeah, that double tax thing. Turns out this isn’t the most difficult part either. I already explained that when investing in Vanguard index funds in euros you’re dealing with the Irish government. In that case you will never get your 15% dividend tax back, because Ireland doesn’t have tax treaties with other countries concerning dividend tax. So unless you’re Irish (what a lovely country you live in!), you’re f***-ed and you’re paying double dividend taxes. But that’s also the reason why you were interested in this blog post…because you are now considering investing in dollars. Let’s get on with it then.
Lahdihdah, you’re investing with Vanguard in dollars and they’re paying you dividend. Yay! This you will be added to your brokerage account. You can opt to reinvest the dividend. You can reclaim the 15% withholding tax the U.S. charged you. Brokers like Lynx and Interactive Brokers make arrangements for reclaiming U.S. withholding tax as soon as you become a customer with them. They will automatically fill in the required W-8BEN form for you. The only thing you need to do is to sign a new copy every three years. They will remind you to do this and you can do this online. No biggie. I spoke to three BinckBank employees and they weren’t familiar with W-8BEN. I talked to three employees of the Dutch IRS and the last guy gave me advice he had regained from another guy. Argh! I also sent an email to Fiscalert and their answer made sense. My best guess is that you need to fill in this form yourself and send it to your IRS. Then you can claim back this dividend tax and settle the amount with the property tax you have to pay.
Again, I am making suggestions and assumptions here. I am not telling you to make a certain choice. Your best bet to reclaim withholding tax is to index invest in dollars. However, there is a VERY SCARY thing to take into consideration. Yup, this is where the difficult stuff commences. Ready?
About the currency risk for Europeans.
If you’re thinking about converting your euros to dollars and start index investing with those dollars you need to think about the currency risk. Europeans will eventually want their dollars transferred back into euros in order to live off them (unless they decide to become long-term residents of the U.S. or visit the country often). If the dollar has devaluated strongly against the euro, you could be in for a big disappointment and even a huge loss on your investments. On the other hand, if the dollar thrives and the euro doesn’t you could be in for a huge windfall. But…nobody can predict the future, now can they? Maybe it’s also not all bad news when thinking about long-term investments. Who knows?
Remember the euro version of index investing with Vanguard? Well, you might think that’s without the currency risk because you’re investing in dollars. However, your euros are converted in to dollars (hence the higher TER) just as well since the fund tracks an index in dollars (FTSE or MSCI for example). So the currency risk for investing in international stocks in euros or dollars is very likely to be the same. Investing in euros in international stocks does not protect you against currency risk.
The only way to reduce currency risk to a minimum is to stick with European stocks only. You won’t have eliminated the currency risk fully even then because there are countries in the mix which handle other currencies than the euro (the U.K. pound for example!) and the companies you’ll be investing in are doing business globally, and are thus affected by the dollar as well. Index investing in euros (especially in international funds) is owning a lower currency risk portfolio but you’re not completely free from currency-risk.
Make a decision on whether you want to invest in euros or dollars and then whether you want to invest worldwide or Europe-only. It would be wise not to change course and stick to your decision after you made it and thus avoid making unneccessary costs. .
It’s up to you and your vision of the world how you feel about currency risk. I am merely working out different points of view here.
Hedging against the currency risk.
Scary stuff, right? Now, there is a way to sort of insure yourself against this currency risk. It’s called hedging, it doesn’t come cheap, sometimes it works out well, sometimes it doesn’t and this is how it works.
This is how the Interactive Brokers guy explained it to me. You want to hedge against currency risk so before you order you told your broker you want to go short. Let’s say you want to invest €5,000. You decide to buy 73 Vanguard Total Stock Market ETFs at $93 a pop totaling $6,789. Both transactions (transferring from euros to dollars and buying the ETFs) will have cost you $9 in total as described above. That money is lost. Because you hedged against the currency risk your balance with your broker is +€5,000 and -$6,789 (because you borrowed that amount in dollars). You’d be paying about 1.5% interest (p.6) annually (this is subject to change!) on the outstanding dollar balance. This would cost you $101.84 a year. As we’re long-term investors, this would cost you $2,036 over the next 20 years. But surely, this won’t be the only investment you’re making. So, hedging will cost the long-term investor thousands and thousands. Sounds worthwhile for the short-term investor, and that’s not us. Is it worth it? That’s up to you.
Please, bear in mind that the Vanguard funds in euros are not dollar hedged against currency risks (that would increase TER tremendously). For example, the Vanguard FTSE All-World ETF is currency unhedged. However, the Vanguard Developed Europe fund is unhedged against currency risk as well (only 45% is invested in euros!).
Again, this is what I know. I am not saying they’re fixed facts.
Risk analysis
This is OUR risk analysis, which we’ll be using to make our OWN PERSONAL investing decision. It might be helpful for you, it might not.
|
Currency risk |
Costs |
Dividend leakage |
Bankruptcy risk |
|
European index in euros
|
| Meesman MSCI Europe (via Vanguard) |
Low |
High (0.5% TER (0.35% as of December 2013?), 0.5% transaction fees) |
Yes |
Low |
| Vanguard FTSE Developed Europe UCITS via BinckBank |
Low |
Low (0.15% TER, €6.50 + 0.10%, minimum of €10) |
Yes |
Low |
| Ohpen European Index Fund MSCI Europe (not Vanguard!) |
Low |
High (0.52% TER, 0.5% transaction fees) |
Yes |
Low |
| iShares MSCI Europe UCITS ETF (inc) via BinckBank |
Low |
Medium (0.35% TER, €6.50 + 0.10%, minimum of €10) |
No |
Low |
| iShares MSCI Europe UCITS ETF (acc) via BinckBank |
Low |
Medium (0.35% TER, €6.50 + 0.10%, minimum of €10) |
No |
Low |
|
World index in euros
|
| Vanguard FTSE All-World ETF via BinckBank |
Medium |
Medium (0.25% TER, €6.50 + 0.10%, minimum of €10) |
Yes |
Low |
| Meesman World Index (Northern Trust instead of Vanguard!) |
Medium |
High (0.5% TER, 0.5% transaction fees) |
No (probably 0.4% higher returns?) |
Low |
|
World index in dollars
|
| Vanguard Total World Stock Index via Interactive Brokers |
Medium |
Low (0.18% TER, $9 currency + stock transaction fees) |
No |
High (stocks held in U.S.) |
| Vanguard FTSE All-World ETF via Interactive Brokers |
Medium |
Medium (0.25% TER, $9 currency + stock transaction fees) |
Yes |
High (stocks held in U.S.) |
|
U.S.-only index in dollars
|
| Vanguard Total Stock Market ETF via Interactive Brokers |
High |
Very low (0.05% TER, $9 currency + stock transaction fees) |
No |
High (stocks held in the U.S.) |
| Vanguard S&P500 ETF via Interactive Brokers |
High |
Very low (0.05% TER, $9 currency + stock transaction fees) |
No |
High (stocks held in the U.S.) |
(Interactive Brokers and Lynx charge the same currency and stock transaction fees)
(iShares avoids double taxation through a crest http://nl.ishares.com/nl/rc/over/belasting)
Again, I am not telling you which investment decision to make.
We haven’t made a decision yet. We’re thinking of sticking with Vanguard (because their index funds outperform others based on the same benchmark pretty much all of the time), investing in Europe with euros and investing in the U.S. with dollars. Maybe throw a little bit of emerging in the mix. Or opt for the easy solution: All-World in euros which holds the ideal mix at an acceptable TER. Sigh….
Please, tell me what you would/are going to do and why. Oh, and, good luck!
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 posts. I am merely sharing ideas and findings of my very amateurish investigation on index investing.
EconoWiser 