ETF choice and asset allocation (based in EU)

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Topic Author
Paddarazi
Posts: 9
Joined: Wed May 12, 2021 11:20 am

ETF choice and asset allocation (based in EU)

Post by Paddarazi »

Hello everybody,
I would love to get some advice on choice of ETFs for my portfolio. Thank you in advance for any help.

I live in France with my wife and three children (so we have a high income tax allowance of more than 40,000 Euros.) My wife and I are both 36, recently moved here from UK, not planning on going back but our kids might in the future.

We have approximately 750,000 Euros to invest. Our expenses are approximately 40,000 Euros a year and we have 2 years of Emergency Fund.

We have a small amount of student debit (less than 5k)

We are hovering between a 60/40 and 70/30 Equities / Bonds split.

We would prefer a good amount of both US and emerging market allocation within the portfolio (don't feel the to weight towards French or European stocks)

I will have a teachers pension from the UK (7 years service so not huge) and have a small private pension (3 years contributions)

Currently our portfolio is in cash. We work part-time jobs here, should earn enough to live off (around 45000 Euros) but it is possible we would take 5-10000 Euros a year from portfolio if necessary. Won't be making contributions to the portfolio anytime soon.

I have been really interested in the FIRE movement and would be happy to invest in something like this for the main part of the portfolio: Vanguard FTSE All-World UCITS ETF USD Acc
Is there an alternative you would recommend?

As I don't know if I'll want to take income each year, do I need to put some assets into a distributing fund like Vanguard FTSE All-World UCITS ETF IE00B3RBWM25 USD?

However, my wife thinks that given our age, and the fact we shouldn't be needing the money for a while, we should be more aggressive with part of the portfolio more weighted towards India / China / Japan / Private Equity / Hedge Funds (though these last two may not be very Bogleheads!). Any thoughts or suggestions?

Also, would you invest the 30-40% defensive part of the portfolio into just bonds or add in gold or something else as well as well? (If so how much?)

I understand that time in the market is more important than timing the market. Nonetheless, current circumstances feel overvalued. Would you phase in or invest the whole lot in one go?

I'm happy to monitor and rebalance every so often but don't want to be too active in monitoring, would rather 'set and forget' for at six months at a time.

Any other advice regarding European brokers, ETFs or asset allocations?

Thank you!
Paddarazi
Jaymover
Posts: 78
Joined: Wed May 12, 2021 8:19 pm

Re: ETF choice and asset allocation (based in EU)

Post by Jaymover »

Im no expert but you can more or less try and copy the following with separate Vanguard ETFs.

Vanguard LifeStrategy® 60% Equity UCITS ETF (EUR) Accumulating - Un exchange-traded fund

Vanguard FTSE Developed World UCITS ETF (USD) Accumulating 19.5%
Vanguard FTSE All-World UCITS ETF (USD) Accumulating 19.4 V
Vanguard Global Aggregate Bond UCITS ETF EUR Hedged Accumulating 19.1
Vanguard FTSE North America UCITS ETF (USD) Distributing 11.4
Vanguard USD Treasury Bond UCITS ETF EUR Hedged Accumulating 6.0
Vanguard EUR Eurozone Government Bond UCITS ETF (EUR) Accumulating 6.0
Vanguard USD Corporate Bond UCITS ETF EUR Hedged Accumulating 5.3
Vanguard FTSE Emerging Markets UCITS ETF (USD) Accumulating 4.7
Vanguard FTSE Developed Europe UCITS ETF (EUR) Accumulating 3.3
Vanguard EUR Corporate Bond UCITS ETF (EUR) Accumulating 2.0
Vanguard FTSE Japan UCITS ETF (USD) Accumulating 1.4
Vanguard FTSE Developed Asia Pacific ex Japan UCITS ETF (USD) Accumulating 1.0
Vanguard U.K. Gilt UCITS ETF EUR Hedged Accumulating 0.9

You could make it much simpler, just 3 ETFs. .....


Vanguard FTSE All-World UCITS ETF (USD) Distributing 55% - heaps of US stocks in there.
Vanguard Global Aggregate Bond UCITS ETF EUR Hedged Distributing 40%
Vanguard FTSE Emerging Markets UCITS ETF (USD) Distributing 5%

Use the distributions to rebalance every 3 to 6 months.

Agree to your percentages AND THEN STICK TO IT. Or see if Vanguard changes the above allocations and modify accordingly. If they change their allocations in a major way, it is for a very good reason.
Astones
Posts: 321
Joined: Mon Apr 12, 2021 12:48 pm

Re: ETF choice and asset allocation (based in EU)

Post by Astones »

Paddarazi wrote: Fri May 14, 2021 2:18 pm As I don't know if I'll want to take income each year, do I need to put some assets into a distributing fund like Vanguard FTSE All-World UCITS ETF IE00B3RBWM25 USD?
No. Accumulating is better. If you really need money you can still sell some shares.

Paddarazi wrote: Fri May 14, 2021 2:18 pm However, my wife thinks that given our age, and the fact we shouldn't be needing the money for a while, we should be more aggressive with part of the portfolio more weighted towards India / China / Japan / Private Equity / Hedge Funds (though these last two may not be very Bogleheads!). Any thoughts or suggestions?
Rather than going All-world with a single fund, you can split the developed and emerging market component using two funds and weight according to your risk tolerance.
Vanguard have those possibility, but after careful analysis I have concluded that the best way to go if you want to split is iShares.

iShares MSCI world UCITS (Acc)
iShares MSCI emerging market UCITS (Acc)

then, you can also add small cap. Small cap are generally considered with larger volatility but also larger expected returns

iShares MSCI world small cap UCITS (Acc)

Do not weight toward specific countries. The expense ratios are higher and it is not written anywhere that the concentration will help you. Do not invest in hedge funds either.

Paddarazi wrote: Fri May 14, 2021 2:18 pm Also, would you invest the 30-40% defensive part of the portfolio into just bonds or add in gold or something else as well as well? (If so how much?)
I'm in my 30s as well and I personally plan to have 90% in stocks and 10 % in bonds, but if you want to have a more aggressive approach 100% is probably the right way to go for you.
Paddarazi wrote: Fri May 14, 2021 2:18 pm I understand that time in the market is more important than timing the market. Nonetheless, current circumstances feel overvalued. Would you phase in or invest the whole lot in one go?
Lump sum is generally considered better, but if it makes you sleep better at night you can dilute your investment in at most 3 years. Personally, giving that you have a broadly diversified portfolio, even geographically diversified, you'd probably be better off by just investing what you have to invest and then forget about it for a decade. Emerging markets are not overvalued today.
Topic Author
Paddarazi
Posts: 9
Joined: Wed May 12, 2021 11:20 am

Re: ETF choice and asset allocation (based in EU)

Post by Paddarazi »

Thanks Jaymover and Astones.

I like the Vanguard 3 ETF strategy for simplicity. If we go down the simple route this seems the way to go.

I see the point re: Accumulating.

Good point re: Small Caps, I might well do this if we take the more 'active' approach.

Is there a reason you prefer the iShares world and emerging market UCITS over the Vanguard ones? Is it cost?

Take the point re: specific countries and hedge funds.

Despite what I know about historical performance etc I don't think my risk tolerance can cope with lump sum and very high equity allocation, will probably phase in 70/30 over a year or so. At least if there is a crash (probably unlikely despite the high market valuations as there is now so much stimulus in the system) I can then go more aggressive.

Thanks so much both of you for getting back to me.
Astones
Posts: 321
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Re: ETF choice and asset allocation (based in EU)

Post by Astones »

Paddarazi wrote: Sun May 16, 2021 12:17 pm Is there a reason you prefer the iShares world and emerging market UCITS over the Vanguard ones? Is it cost?
Costs should be close enough, but there are other reasons for choosing iShares.

1) larger fund size. This is the main reason. When it comes to passive investing, it is generally considered wiser to look for passive ETF with large fund size, so that expenses are kept lower because of the economy of scales, there is more liquidity and there is lower risk that the fund is closed/merged. Here you can find a good article by JustETF that explains why larger funds are preferable
https://www.justetf.com/uk/news/etf/siz ... -etfs.html

If you use the single Vanguard fund FTSE all-world it should be large enough, but for example the Vanguard emerging market (acc) ETF looks definitely too small.

just compare the fund size of this Vanguard
https://www.justetf.com/en/etf-profile. ... 3#overview
with this iShares
https://www.justetf.com/en/etf-profile. ... 6#overview


2) longer history. They have been available for a longer time and so they have a longer record of tracking performance. In order to see the plot with the tracking history you need to check a document called KIID. You can find it in the page describing the fund (it must be there somewhere, no matter what website you're using)

So, if you just want to go for simplicity, then Vanguard FTSE All-World UCITS ETF (Acc) is probably a good option, but if you want to split Developed and EM I'd much rather choose the two iShares than the two Vanguard.

3) minor detail: the small cap is going to be iShares no matter what, so what I do is to have those 3 iShares funds, I check the market cap of each of them from the MSCI fact sheets, and weight them in my portfolio proportionally to their market cap, so that I don't have to overthink what to do with the weights and it's fairly straightforward.
Jaymover
Posts: 78
Joined: Wed May 12, 2021 8:19 pm

Re: ETF choice and asset allocation (based in EU)

Post by Jaymover »

No. Accumulating is better. If you really need money you can still sell some shares.
I beg to differ here.

Even if the dividends are reinvested they will probably be taxed in the same way each year as if they were distributed. You might want to check your tax rules here. If it is more tax efficient then go for it.

Also, as long as you don't fritter away and spend the distributions it is possibly more tax efficient way to rebalance as you will be constantly buying parcels (either buying bonds or buying stock etfs) rather than ever selling anything. If you sell some of your stock etfs when rebalancing you create a capital gains tax event. Depending on the tax rules in your country it is probably better to defer all capital gains tax events and sell stuff later on in retirement when you earn less.

I look at my assets and rebalanceas soon as the distributions hit my account (4x per year). A great reminder.
Astones
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Re: ETF choice and asset allocation (based in EU)

Post by Astones »

Jaymover wrote: Sun May 16, 2021 7:16 pm
I look at my assets and rebalanceas soon as the distributions hit my account (4x per year). A great reminder.
Reinvesting every time there is a distribution requires a big commitment and you might incur in transaction costs, depending on your brokerage account. Morever, in some accounts in addition to taxes you pay a commission over the distribution of dividends, like in the Degiro Custody account.
Jaymover
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Re: ETF choice and asset allocation (based in EU)

Post by Jaymover »

Reinvesting every time there is a distribution requires a big commitment and you might incur in transaction costs, depending on your brokerage account. Morever, in some accounts in addition to taxes you pay a commission over the distribution of dividends, like in the Degiro Custody account.
It really is so country dependent (Im in Australia) and I can get trades for $5 these days with no extra costs apart from buy sell spread. In France it looks like if you hold an asset for more than 6 years the capital gains tax owed drops substantially which suggests holding onto assets for as long as possible without selling anything makes sense.

Id avoid any platforms, accounts etc with hidden commissions or fees.
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tre3sori
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Re: ETF choice and asset allocation (based in EU)

Post by tre3sori »

Is there an alternative you would recommend?
Vanguard FTSE All-World UCITS ETF USD Acc is a great choice, but you have to take a look at the whole portfolio.

Theoretically my favorit would be
100% Vanguard LifeStrategy® 60% or 80% Equity UCITS ETF (EUR) Accumulating or Distributing
Unfortunately these one fund solutions have become available just recently. So not sure if they will survive.
With these funds you wouldn't have to care about (tax-inefficient) rebalancing any more.

A two fund solution could be
60% (or 70%) Vanguard FTSE All-World UCITS ETF (USD) Accumulating or Distributing
40% (or 30%) Vanguard Global Aggregate Bond UCITS ETF EUR Hedged Accumulating or Distributing

or the equivalent iShares ETFs: iShares MSCI ACWI UCITS ETF, iShares Core Global Aggregate Bond UCITS ETF EUR Hedged

Vanguard FTSE All-World UCITS ETF has maket cap weighted exposure to Emerging Markets (about 11%).
So no need to add a separate Emerging Markets ETF.

A four fund solution could be
50% iShares Core MSCI World UCITS ETF
10% iShares Core MSCI EM IMI UCITS ETF
10% iShares MSCI World Small Cap UCITS ETF
30% iShares Core Global Aggregate Bond UCITS ETF EUR Hedged

This would cover almost all of the investible market. I would not make it more complicated than that.

If you expect to withdraw 5-10K € every year, than use the distributing versions.
As of now the Vanguard two fund solution will give you about 8.300€ distributions a year for 750.000€ (before tax).
we should be more aggressive with part of the portfolio more weighted towards India / China / Japan / Private Equity / Hedge Funds (though these last two may not be very Bogleheads!). Any thoughts or suggestions?
Don't try to be smarter than the market. Let the markets decide what the right weights are.
Would you phase in or invest the whole lot in one go?
I would invest immediately. But that's me. Do you want to maximize your expected return or minimize your potential regret?
Invest immediately, if you want to maximize your expected return. € cost average over a period of say 15 months (that is invest 50K/month) if you are afraid of putting it in all at once. Or maybe 250K semiannually if transaction costs are of concern.
Any other advice regarding ... asset allocations?
Could you live with investing 750K now in a 70/30 stock/bond portfolio and ending up with 450K in say 3 years?
Because this is, what could happen. But it could also happen in 6 years after another 40% surge in equities. Who knows.
Point is: It is good to look at actual numbers when trying to guess risk tolerance. A 50% drawdown in stocks would mean roundabout
-375K in a 100/0 portfolio, or a portfolio value of 375K
-265K in a 70/30 portfolio, or a portfolio value of 485K
-185K in a 50/50 portfolio, or a portfolio value of 565K
Does 375K left of 750K look scary to you (it does to me)? Than think about investing more aggressively AFTER you have experienced a bad bear market.
Let every man divide his money into three parts, and invest a third in land, a third in business, a third let him keep by him in reserve. Talmud | 35% Real Estate, 45% Stocks, 15% Bonds, 4% Gold, 1% Cash
Valuethinker
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Re: ETF choice and asset allocation (based in EU)

Post by Valuethinker »

tre3sori wrote: Sun May 16, 2021 10:09 pm
Any other advice regarding ... asset allocations?
Could you live with investing 750K now in a 70/30 stock/bond portfolio and ending up with 450K in say 3 years?
Because this is, what could happen. But it could also happen in 6 years after another 40% surge in equities. Who knows.
Point is: It is good to look at actual numbers when trying to guess risk tolerance. A 50% drawdown in stocks would mean roundabout
-375K in a 100/0 portfolio, or a portfolio value of 375K
-265K in a 70/30 portfolio, or a portfolio value of 485K
-185K in a 50/50 portfolio, or a portfolio value of 565K
Does 375K left of 750K look scary to you (it does to me)? Than think about investing more aggressively AFTER you have experienced a bad bear market.
And this is so very good advice. The shock of a bad bear market has to be experienced to be understood. And recent bears (2008/9, 2020) have recovered very quickly, which has perhaps taught investors the wrong lessons. 2000-03 was a c 30 month bear market. And in the 70s, bear markets were quite long-lasting.

The original poster is wise to consider say 30-40% in safe assets. Global govt bond fund, hedged to Euros. If yields on inflation linked bonds were higher, I would suggest up to half of that in inflation linked bonds.

Problem with a Eurozone govt bond fund is too much of that fund (nearly half) will be Italian govt bonds. That's a huge bet on Italy not entering a Greece like scenario (one Italian political party at least has advocated more or less doing just that? - an intentional exit from Euro, I believe). The bond market, in awarding Italian govt bonds say a 2% yield premium to German (which are presumed to be risk-free) is saying that there is, roughly, a 2% chance of this happening in any given year (picture is much more complex than that, of course).

It is reasonable, at current Eurozone bond yields (i.e. negative for the safest govt bonds) to instead hold cash deposits at a bank, as long as within the EUR 100k limit for deposit insurance AND certainty that the national govt can finance a bailout. So no problem w a French deposit taking institution but you get oddities in the UK like banks with million+ customers and a banking license from Estonia - there's no way Estonia could finance a big bailout of depositors.
Topic Author
Paddarazi
Posts: 9
Joined: Wed May 12, 2021 11:20 am

Re: ETF choice and asset allocation (based in EU)

Post by Paddarazi »

Thanks everyone so much for your input. I need to have a proper think about all this, particularly what you at about bonds as I’m not as knowledgable about them.
As ever it’s the eternal issue of ‘this feels different’ so one is tempted to act as if circumstances will be significantly different to historical patterns...
Stork
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Location: EU

Re: ETF choice and asset allocation (based in EU)

Post by Stork »

For bank accounts, consider N26. No interest, no cost, guaranteed by the German government.

Brokers: Have a look at Interactive Brokers or DeGiro, there may be some French worth considering too.

You can read more on bankeronwheels.com, he is very aligned with bogleheads. There is an article about brokers.
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