EU investment portfolio optimization [SPAIN]

For residents of Spain.
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international001
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EU investment portfolio optimization [SPAIN]

Post by international001 »

This are the catches investing in Spain today

BNP offers Amundi and Vanguard index funds. Vanguard are usually better. However (recently), you want Vanguard less than 50% of your portfoliobecause they are considered clean. They don't pay $$ to BNP. Otherwise, you have to pay an extra 0.02% (monthly!) comission for the Vanguard funds

DeGiro allows you buy index iShares ETFs, with low commissions. Why not go all ETFs? Because you cannot rebalance as a tax free event. With funds you can. Legislation for exchange $$ between ETFs is there, so perhaps it will be possible in a few years, not today.

Let's assume a conservative portfolio, with 30% stocks only (50% of them global total market, 10% EM, 40% small cap tilt)

The portfolio I came up with is the following. Can it be optimized? More than the math I'm interested in the strategy. Most in ishares because they have lowest commissions. But some in BNP's funds to do rebalancing. Always, ~55% in Amundi funds

Asset Class Name Ticker ISIN ER Allocation
Bond iShares Global Aggregate Bond AGGH IE00BDBRDM35 0.1 60.00%
Bond Vanguard Global Bond IE00BGCZ0933 0.2 10.00%
Bond AMUNDI GBI Global Govies AHE-C LU0389812933 0.35 0.00%
Global Equity iShares Core MSCI World SWDA IE00B4L5Y983 0.2 0.00%
Global Equity VANGUARD GB ST IX INV (EUR) IE00B03HCZ61 0.3 0.00%
Global Equity Amundi MSCI World AE-C LU0996182563 0.3 15.00%
Global Equity (SC) iShares MSCI World Small Cap UCITS ETF WSML IE00BF4RFH31 0.35 8.00%
Global Equity (SC) VANGUARD GB SMALL-CAP IDX INV (EUR) IE00B42W3S00 0.4 4.00%
Emerging iShares Core MSCI EM IMI UCITS ETF EIMI IE00BKM4GZ66 0.18 2.00%
Emerging VANGUARD EM MK ST IX INV (EUR) IE0031786142 0.4 0.00%
Emerging Amundi Funds Index Equity Emerging M LU0996177134 0.45 1.00%
DJN
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Re: EU investment portfolio optimization [SPAIN]

Post by DJN »

Hi,
I assume that because of the local tax legislation that you cannot use the simplest form of BH three (+) fund, perhaps you are laying out a choice of three? I am constantly amazed at how difficult it is in the EU to diy invest, it's extraordinary after so many years of the EU that there is very little technical commonality across the countries.
Anyway, why are you using three bond funds, this looks like a duplication or at least is some form of overlap?
You have what I would call a good base portfolio in the three you have already highlighted:
- AGGH
- SWDA
- EIMI
- WSML
That would be a great base.You need to check whether your local tax legislation allows you to use accumulating funds or whether you have to declare the dividends on a regular basis.
good luck
DJN
Yah shure. | Have a look at the Bogleheads Wiki in the first instance.
Topic Author
international001
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Re: EU investment portfolio optimization [SPAIN]

Post by international001 »

I'm trying to do the 3 BH fund principle, with a tilt towards small cap (my personal choice). This are the 4 ETFs you mention. Instead of a US + intl, I have a global ETFs, but I have to add emergings. This are the available ETFs.

However, I want to capture also the benefits that you have in Spain with funds. This is, that you can make conversions between one and the other without being taxed for it. This is a nice feature that US ETFs/funds don't have.
DJN
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Re: EU investment portfolio optimization [SPAIN]

Post by DJN »

Hi,
I work on the basis that for investors outside the US, taking advantage of the most diverse markets makes sense therefore AGGH and SWDA and EIMI are perfect. The AGGH includes corporate debt and if you are very risk adverse you might want to stick with treasuries and global government debt only. Someone made the comment to me that you need to check the underlying indices for each one in order to make sure that the different indices don't overlap which is a good point.
Making "transfers" presumably involves selling and buying again which will add to your expenses. Not sure why you would want to do that.
DJN
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randomizer
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Re: EU investment portfolio optimization [SPAIN]

Post by randomizer »

Pretty amazing that you can rebalance as a tax-free event (with index funds). Can't do that in the US. Seems to be about the only good thing about investing in the EU (although I don't know if this is true in all EU countries); pretty much everything else about it sucks compared to investing in the US.
87.5:12.5, EM tilt — HODL the course!
TedSwippet
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Re: EU investment portfolio optimization [SPAIN]

Post by TedSwippet »

randomizer wrote: Wed Aug 29, 2018 5:33 amPretty amazing that you can rebalance as a tax-free event (with index funds). Can't do that in the US. Seems to be about the only good thing about investing in the EU (although I don't know if this is true in all EU countries); pretty much everything else about it sucks compared to investing in the US.
Compared to a decade or two ago I think the non-US situation is actually pretty good these days, even in what US folk usually consider to be 'high tax' European countries.

We now have an excellent range of ETFs that are readily available more or less worldwide (excluding the US!) and with TERs between around 0.07% and 0.25%. We also have accumulation options on some of them, particularly useful to save on trading costs and on taxes where countries do not tax 'accumulated' dividends until shares are sold. This feature is entirely off-limits to Americans, since they can realistically only buy US domiciled ETFs and US fund regulation does not allow accumulation funds.

Investors in the UK can often rebalance without tax drag because the UK has an annual £11.7k capital gains tax exemption that applies before any capital gains taxes begin. And if below the exemption, there is no need to even report this on an annual tax return. There is also a special low UK tax rate and a further exemption for share dividends. UK tax rates can be higher than the federal plus state rates found in many parts of the US, but by no means all. In California and New York, for example, the combined FICA, federal, state, and perhaps city income taxes can often equal or even exceed UK rates on comparable levels of income.

As someone who has invested through a decade in the US and then another decade in the UK, I do not find the UK particularly worse. The lack of a decent and fully-featured Vanguard direct-to-customer offering is probably the main frustration. Beyond that, some niggles. But then there are niggles for US investors too. For example, restrictive pension and retirement savings options, no annual capital gains tax exemption, states taxing capital gains at income rates, and duplicative tax reporting to two or three levels of government, often with the need to iterate and redo because a broker produces a corrected tax form long after the tax filing deadline.

Given the choice of the two, I would personally take the UK tax regime's pragmatic approach over the US's overbearing one. Plus, of course, as a non-US person, if you don't like the tax regime you are living in you can simply move to another country to escape it. No such option exists for most US investors due to the US's citizenship-based taxation (or should that be 'taxation-based citizenship'?).
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international001
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Re: EU investment portfolio optimization [SPAIN]

Post by international001 »

Don't you think double taxation is a point in favor of US investors?
i.e. if you are a UK investor and invest on an Irish fund for the SP500, the 15% the US IRS takes you don't get it back, and you have to pay UK taxes on top. This is how I understood it works based on our discussions in the past.

Also, while the accumulating funds are nice, they are not completely like a tax deferred system. When you accumulate the dividends into the fund/ETF without paying taxes, the cost basis for this dividends depends on when the capital was invested, so it's usually reduced

Imagine you accumulate:
year 0: Invest 1000E
year 1: Value goes to 2000E, and you get 100E dividends, accumulated. VAlue becomes 2100E
year 2: Value goes to 4200E. You withdraw them. You pay in taxes (4200E-2000E)x cap-gain-tax-rate

If you distribute and re-invest:
year 0: Invest 1000E
year 1: Value goes to 2000E, and you get 100E dividends. You reinvest. Value becomes 2100E. You pay 100 x div-gain-tax-rate
year 2: Value goes to 4200E. You withdraw them. You pay in taxes ( (4000E-2000E)+ (200-100E)) x cap-gain-tax-rate

So everything depends on the particulars (rates, time, growth)
Makes sense?
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international001
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Re: EU investment portfolio optimization [SPAIN]

Post by international001 »

DJN wrote: Wed Aug 29, 2018 3:44 am Hi,
I work on the basis that for investors outside the US, taking advantage of the most diverse markets makes sense therefore AGGH and SWDA and EIMI are perfect. The AGGH includes corporate debt and if you are very risk adverse you might want to stick with treasuries and global government debt only. Someone made the comment to me that you need to check the underlying indices for each one in order to make sure that the different indices don't overlap which is a good point.
Making "transfers" presumably involves selling and buying again which will add to your expenses. Not sure why you would want to do that.
DJN
AGGH is total bonds, kind of VAnguard BND+BNDX
Global Goverment bonds are fine, but they don't offer much better security than corporate bonds. Perhaps it was the last Euro bond crisis and will change in the feature.
I would love to have a hedge fund/ETF of US goverment bonds, but couldn't find one hedged to Euros. Can you recommend?

No, in Spain you can make transfers w/o being taxed. I think it's a rational feature. It's a way of flexibility and allows you to try funds you may later be not interested in. TM = LC + MC +SC. Sometimes you just choose TM so you are not stucked with a component fund
TedSwippet
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Re: EU investment portfolio optimization [SPAIN]

Post by TedSwippet »

international001 wrote: Wed Aug 29, 2018 7:14 amDon't you think double taxation is a point in favor of US investors? i.e. if you are a UK investor and invest on an Irish fund for the SP500, the 15% the US IRS takes you don't get it back, and you have to pay UK taxes on top. This is how I understood it works based on our discussions in the past.
It is how things work. However, the lower UK rate specific to dividends and the extra UK zero-tax band for dividends provides an offset, as does a generous annual capital gains tax exemption. By comparison, US investors are taxed on their entire dividends receipts at their top marginal rates, and on every last penny of capital gain. So an average UK investor could easily win out over a similarly situated US one here.
international001 wrote: Wed Aug 29, 2018 7:14 amAlso, while the accumulating funds are nice, they are not completely like a tax deferred system. When you accumulate the dividends into the fund/ETF without paying taxes, the cost basis for this dividends depends on when the capital was invested, so it's usually reduced.
Although the UK does not, some countries effectively allow investors to convert higher taxed dividends into lower taxed capital gains by using accumulation funds. Not completely tax free then, but definitely tax deferred in countries where any capital gains tax doesn't have to be paid until sale, and also tax arbitrage in countries where that effectively converts a higher tax rate into a lower one.

We have already had this discussion -- and I know that your (apparently unshakeable!) view is that the US is the best place on the planet to invest, bar none -- but it is worth restating here that a flat comparison between a US investor's circumstances and a generalised non-US investor's one is simply impossible.

There are many, many non-US tax regimes in the world, and each will have nuances and subtleties that could easily make it more investor-friendly than the US tax regime for investors in particular circumstances. The US overall is probably a somewhat average tax regime for investors. Some parts of it are particularly investor-friendly, for example the no income tax states such as Florida, Texas and New Hampshire. Conversely, California, New York state, and similar can be particularly investor-unfriendly.
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randomizer
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Re: EU investment portfolio optimization [SPAIN]

Post by randomizer »

TedSwippet wrote: Wed Aug 29, 2018 6:18 am
randomizer wrote: Wed Aug 29, 2018 5:33 amPretty amazing that you can rebalance as a tax-free event (with index funds). Can't do that in the US. Seems to be about the only good thing about investing in the EU (although I don't know if this is true in all EU countries); pretty much everything else about it sucks compared to investing in the US.
Compared to a decade or two ago I think the non-US situation is actually pretty good these days, even in what US folk usually consider to be 'high tax' European countries.
I'm speaking more out of fear and ignorance than anything else. It has always seemed a veritable minefield of country-specific exceptions, gotchas etc despite what I would have expected given the economic unity of the EU. It's useful to have the perspective of people such as yourself who have actually sorted through all of this.
87.5:12.5, EM tilt — HODL the course!
DJN
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Re: EU investment portfolio optimization [SPAIN]

Post by DJN »

Hi Mr Randomizer,
I'm speaking more out of fear and ignorance than anything else. It has always seemed a veritable minefield of country-specific exceptions, gotchas etc despite what I would have expected given the economic unity of the EU.
I am with you on this one, the EU has not introduced any significant clarity across the piste for European investors and I fully understand why companies like Vanguard are probably very wary of setting up shop properly. The UK and probably Germany are technical exceptions, the UK because of its long history in the financial sector and Germany because the customers want value. Elsewhere it is not so great with ongoing vested interests controlling what governments do and in particular through the influence of the insurance and pension industries. I work across Europe and I believe that the vast majority of people are unaware of the inconsistencies between countries. This probably deserves a debate / string of its own.
DJN
Yah shure. | Have a look at the Bogleheads Wiki in the first instance.
TedSwippet
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Re: EU investment portfolio optimization [SPAIN]

Post by TedSwippet »

DJN wrote: Wed Aug 29, 2018 10:50 amI am with you on this one, the EU has not introduced any significant clarity across the piste for European investors and I fully understand why companies like Vanguard are probably very wary of setting up shop properly. The UK and probably Germany are technical exceptions, the UK because of its long history in the financial sector and Germany because the customers want value.
I suppose it is possible that the UK and German are the only two shining beacons of hope in an otherwise entirely bleak European investment landscape, but it doesn't feel that way to me.

Now that Vanguard and iShares have full and complete ranges of ETFs available across all these countries (and more), there are much the same investment opportunities available to everyone. The tax details that apply to them are certainly country-specific, and some will be worse than others, but I can think offhand of several European countries that are more investor-friendly overall than the UK. Switzerland has no capital gains taxes. Bulgaria taxes income at a flat 10% rate. Hungary, Romania, Lithuania and the Czech Republic all have sub-20% flat tax rates. And so on.

My guess is that to the extent that European investors are not using these investment opportunities it is because they don't know about them rather than because they are unavailable. Local banks and financial institutions in these countries will very likely have a vested interest in keeping everything that is better value than their own offering hidden, but over time market competition should erode that state of affairs. I am pretty sure Interactive Brokers accounts are available widely to most if not all European residents.

Maybe my glasses are rose-tinted, but I do not see things on this side of the pond as being terribly unpromising.
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international001
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Re: EU investment portfolio optimization [SPAIN]

Post by international001 »

I know first hand how most people is financially ignorant (in Spain) and they follow the local banks directives. Hopefully it will change in 10-20 years

And yes, I still think USA is the best place to invest in terms of its overall structure. Of course, if you have special deductions, different rates and different conversions, it's not a flat comparison. My main point is that you avoid most of the double taxation because you get the chance of investing on US stocks that are only taxed once at relatively low rates. But YMMV.


I see ishares ETFs as the best option. Anybody has an equivalent ETF to AGGH via Vanguard?
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BeBH65
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Re: EU investment portfolio optimization [SPAIN]

Post by BeBH65 »

randomizer wrote: Wed Aug 29, 2018 10:26 am Pretty amazing that you can rebalance as a tax-free event (with index funds). Can't do that in the US.
I remember seeing this inside wrappers like a kind of retirement accounts as well as inside life insurance contracts. (*)
In each time the "tax-settlement" is done when the money is "unwrapped"

international001 wrote: Wed Aug 29, 2018 7:14 amAlso, while the accumulating funds are nice, they are not completely like a tax deferred system. When you accumulate the dividends into the fund/ETF without paying taxes, the cost basis for this dividends depends on when the capital was invested, so it's usually reduced.
It is my understanding that for most countries there is no cost basis for the dividends. One will pay the capital-gains tax when one sells the fund. The capital gains tax are paid on the full total-return achieved in the fund: sell price of the fund shares minus their purchase price: hence the following is taxed: the gain on the original capital, the sum of all dividend amoutt and all capital gains of the dividends.


In my understanding this seems quite similar to tax-deferred accounts in the US.



(*) @international001, is there a such wrapper in Spain?
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randomizer
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Re: EU investment portfolio optimization [SPAIN]

Post by randomizer »

international001 wrote: Tue Aug 28, 2018 6:09 pm This are the catches investing in Spain today

BNP offers Amundi and Vanguard index funds. Vanguard are usually better. However (recently), you want Vanguard less than 50% of your portfoliobecause they are considered clean. They don't pay $$ to BNP. Otherwise, you have to pay an extra 0.02% (monthly!) comission for the Vanguard funds
I went looking for a source on this and found it in this schedule of fees (PDF).
(Footnote 13) Esta comisión afecta en exclusiva a Fondos de clase Clean (limpia) o aquellos otros que siendo de cualquier clase no ofrezcan comisión de distribución para BNP Paribas Personal Investors.
Comisión NO aplicable siempre que la cuenta tenga una cartera de fondos con comisión de distribución para BNP Paribas Personal Investors y/o de acciones con una valoración media en el periodo a facturar igual o superior a la de los fondos de la clase “clean”(limpia), o sobre fondos sin comisión de distribución.
It's 0.05% charged quarterly, not monthly. 0.05% + tax! Exactly the kind of hidden, nasty complication I've found so scary and frustrating about Europe. I suppose it could be worse, but still, you're swimming with sharks. Hopefully competition will bring out some easily accessible low-cost options with no sneaky gotchas in the not too distant future.
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international001
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Re: EU investment portfolio optimization [SPAIN]

Post by international001 »

randomizer wrote: Thu Aug 30, 2018 12:52 pm
It's 0.05% charged quarterly, not monthly. 0.05% + tax! Exactly the kind of hidden, nasty complication I've found so scary and frustrating about Europe. I suppose it could be worse, but still, you're swimming with sharks. Hopefully competition will bring out some easily accessible low-cost options with no sneaky gotchas in the not too distant future.
Yes.. so it's (0.05*1.21)*4 = 0.242 % /year..

It's not worth to have the low ER Vanguard funds anymore ;-(
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international001
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Re: EU investment portfolio optimization [SPAIN]

Post by international001 »

BeBH65 wrote: Wed Aug 29, 2018 2:32 pm
It is my understanding that for most countries there is no cost basis for the dividends. One will pay the capital-gains tax when one sells the fund. The capital gains tax are paid on the full total-return achieved in the fund: sell price of the fund shares minus their purchase price: hence the following is taxed: the gain on the original capital, the sum of all dividend amoutt and all capital gains of the dividends.


In my understanding this seems quite similar to tax-deferred accounts in the US.

(*) @international001, is there a such wrapper in Spain?
Sort of.. But this is for taxable funds.. so you pay taxed before doing the contributions (your tax bracket) and you get taxed when you do the distributions (at your capital gains bracket, that it's a little bit progressive in Spain)

So it's not like 401k pre-tax or 401k post-tax, where you save your taxes on contributions or on distributions

So it's more like an 401k after-tax. Contributions are taxed and then the distributions are taxed on the earnings (capital-gains-tax-rate)

Interestingly, a pension plan works like a 401k pre-tax. You deduct the contributions on your earnings and pay at income-tax-rate for distributions. Since income-tax-rate is typically higher than capital-gains-tax-rate, depending on the specifics you may end up better one way or another. For instance, it's impossible to invest in a pension plan with low ER index funds

MAkes sense?
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