European or US Bonds for a spanish investor?

For residents of Spain.
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Topic Author
wenomeno
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European or US Bonds for a spanish investor?

Post by wenomeno »

Hello everybody,

my personal situation as required in the topic Asking Portfolio Questions is this:

age: 30
single
emergency funds: 3 months of expense rate and growing up
desired asset allocation: 35% stocks / 65% bonds
portfolio: currently I have no portfolio, but my idea is 35% Vanguard emerging markets ETF (VWO) 65% Long term gov. bonds, I don´t know exactly which one
capital: 5 figures in euro
there is no such stuff as IRA, 401 and so on in Spain

Before you tell me that I might be more agressive I must say that I´m a conservative investor because the volatility in Spain is riskier than in USA. I mean, although I plan to save for my retirement, the unemployment risk is big, and I mean to be jobless for a long time (several years). Take into account that in Spain, at the peak of bubble unemployment rate was over 8%, and this was the lowest rate in the past 40 years. Of course, this situation implies that maybe I´ll have no choice but redeem my investments.

So, I´m planning a portfolio with a big weight of Goverment Bonds because they have the highest uncorrelation with stocks. BUT, I think that only the US Gov Bonds are highly uncorrelated with stocks, at least in this bear market european bonds are performing as emerging markets bonds. Then, I´ve cheked morningstar and the historical performance of european debt funds is by far lower than US debt funds. So, reasoning in this way I must get some US ETF as Vanguard Long term Gov Bond (VGLT).

At this point my worries are about currency risk, because if I have no choice but sell my ETF at any time, perhaps the EURUSD exchange in that moment may be very unfavorable. In the other hand, difersify among currencies may be a good idea.

So, what is the best asset allocation?, US debt?, Euro debt? Mix both of them? What about only German debt, for example PIMCO Germany Bond Index Fund ETF (BUND)? What about difersify among other currencies ETFs such as PIMCO Canada Bond Index Fund ETF (CAD) and PIMCO Australia Bond Index Fund ETF (AUD)?

Some points about spanish tax enviroment:
- capital gains are taxed at 19% until €6000, from €6001 at 21% rate
- dividends are taxed at the same rate, but until €1500 are exempt (not for ETFs)
- transfer among funds are tax free, until you redeem definitively your money, so rebalancing your portfolio using funds is tax free, there is just one condition, a minimum number of investors in this fund (I think 500, so in practice this is just a problem for new funds)
- funds in Spain have several problems. The minimums are commonly very high, for example minimums for Vanguard´s funds are €100,000. The most of funds have high commissions, it´s very hard to find funds with less than 2% expense ratio, even in index funds. Amundi and Pictet are companies with low cost funds, but here the problem is to find a broker which offers them, it´s no easy, believe me. So, I think that ETFs are simplier.

I think that I´m not forgetting anything.

Regards, Ramón.
Last edited by wenomeno on Fri Dec 16, 2011 11:51 am, edited 1 time in total.
patrick
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Re: European or US Bonds for a spanish investor?

Post by patrick »

My recommendation for bonds would be to buy mostly inflation-indexed Euro government bonds from high-quality issuers. In addition to having currency risk, US bonds also aren't guaranteed to show the low correlations when you want them -- the patterns of the recent past aren't guaranteed to continue. Even with Euro bonds, there is still inflation risk, which can wreck a bond portfolio if you are unlucky.
HongKonger
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Re: European or US Bonds for a spanish investor?

Post by HongKonger »

If you are a non US person living outside the US, you will also need to factor in the additional 30% withholding tax on all dividends from US stocks.
TedSwippet
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Re: European or US Bonds for a spanish investor?

Post by TedSwippet »

HongKonger wrote:If you are a non US person living outside the US, you will also need to factor in the additional 30% withholding tax on all dividends from US stocks.
Spain and the US have a tax treaty, so the tax liability to the US would drop to 15% here. The US will apply this tax even where the investment is held in Spanish tax-deferred or tax-free wrappers.

Of more concern may be FATCA. This can add a new 30% withholding on the gross sale proceeds, not just the gain, from a sale of US situated assets. In that case the OP would need to file a US non-resident treaty-based tax return at the end of the year to recover the missing 30% of their original investment.
Valuethinker
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Re: European or US Bonds for a spanish investor?

Post by Valuethinker »

Wenomeno

If you are going to buy Euro bonds, stick with German ones at the moment, until the outcome for the European Currency Area becomes clear.

Netherlands would also be OK, probably. Not sure about Finland.

Inflation linked bonds are a good idea, but I think only France, Sweden, UK issue them? The UK ones are trading at negative expected real yield, and you have significant currency risk.

Swiss government bonds are obviously paying very little.

My overall thoughts would be something like:

- 60% German government bonds
- 20% Swiss bonds (norway is another favoured currency)- Switzerland, Sweden, Norway
- 20% 'other' bonds: either a diversified European government bond index (you'd lose if Italy/ Spain went down in the Euro zone, but you are getting a higher yield) or some kind of global government bond fund

FWIW Euro zone stocks (ex financials) are probably cheap. That is irrelevant until the Euro Zone issues are resolved-- the market won't exploit that cheapness because of the event risk of an uncontrolled Euro meltdown.
HongKonger
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Re: European or US Bonds for a spanish investor?

Post by HongKonger »

TedSwippet wrote: Of more concern may be FATCA. This can add a new 30% withholding on the gross sale proceeds, not just the gain, from a sale of US situated assets. In that case the OP would need to file a US non-resident treaty-based tax return at the end of the year to recover the missing 30% of their original investment.
Isn't FATCA for US taxpayers with foreign accounts ..hence why many banks outside the US won't give US people bank accounts.
Topic Author
wenomeno
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Joined: Fri Nov 11, 2011 12:53 pm

Re: European or US Bonds for a spanish investor?

Post by wenomeno »

TedSwippet wrote:
HongKonger wrote:If you are a non US person living outside the US, you will also need to factor in the additional 30% withholding tax on all dividends from US stocks.
Spain and the US have a tax treaty, so the tax liability to the US would drop to 15% here. The US will apply this tax even where the investment is held in Spanish tax-deferred or tax-free wrappers.

Of more concern may be FATCA. This can add a new 30% withholding on the gross sale proceeds, not just the gain, from a sale of US situated assets. In that case the OP would need to file a US non-resident treaty-based tax return at the end of the year to recover the missing 30% of their original investment.
Thanks for your answer. As you say, there is a tax treaty, it works in this way, US IRS withhold a 30% of dividens, but give me back 15% in June when I fill my tax form.

I´ve never heard about FATCA, HongKonger doubts if there is for US citizens only. I´d like to clarify this point.

Regards
Topic Author
wenomeno
Posts: 9
Joined: Fri Nov 11, 2011 12:53 pm

Re: European or US Bonds for a spanish investor?

Post by wenomeno »

patrick wrote:My recommendation for bonds would be to buy mostly inflation-indexed Euro government bonds from high-quality issuers. In addition to having currency risk, US bonds also aren't guaranteed to show the low correlations when you want them -- the patterns of the recent past aren't guaranteed to continue. Even with Euro bonds, there is still inflation risk, which can wreck a bond portfolio if you are unlucky.
Hi Patrick.

First, i know that patterns of the recent past aren´t guaranteed to continue, but it´s a pattern that make sense. Then I don´t like TIPs because their return is low. I like a safety asset, but with a decent yield, because getting a too low return drives to nowhere. I think that stocks protect against inflation properly.

Then, as you point there is inflation risk in Euro bonds plus a low return, that´s the reason I´m thinking about US bonds.
Topic Author
wenomeno
Posts: 9
Joined: Fri Nov 11, 2011 12:53 pm

Re: European or US Bonds for a spanish investor?

Post by wenomeno »

Valuethinker wrote:Wenomeno

If you are going to buy Euro bonds, stick with German ones at the moment, until the outcome for the European Currency Area becomes clear.

Netherlands would also be OK, probably. Not sure about Finland.

Inflation linked bonds are a good idea, but I think only France, Sweden, UK issue them? The UK ones are trading at negative expected real yield, and you have significant currency risk.

Swiss government bonds are obviously paying very little.

My overall thoughts would be something like:

- 60% German government bonds
- 20% Swiss bonds (norway is another favoured currency)- Switzerland, Sweden, Norway
- 20% 'other' bonds: either a diversified European government bond index (you'd lose if Italy/ Spain went down in the Euro zone, but you are getting a higher yield) or some kind of global government bond fund

FWIW Euro zone stocks (ex financials) are probably cheap. That is irrelevant until the Euro Zone issues are resolved-- the market won't exploit that cheapness because of the event risk of an uncontrolled Euro meltdown.
Hi Valuethinker,

at the moment I´m going to do nothing. I still have not a well-defined plan. About to invest in Swiss and other countries bonds, there is a problem with investment vehicles. I mean, there are some ETFs with German, Australian or Canadian bonds, but I don´t find anything good for other countries. There are a couple of brokers in Germany for buying bonds directly, Vitrade and Dab Bank, and they are an option, but I think that with a small amount to invest a fund or ETF is a better idea.

On purpose, right now, spanish bonds are a quite safety option because Goverment modified Constitution and Public Debt payment has priority over any other Gov Spent ans Social Security funds are invested in Public Debt too, so I think that is enough guarantee. The point is that this high yields are consequence of the crisis and in the long run I think that spanish debt is going to performance like emerging markets debt.

regards
TedSwippet
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Re: European or US Bonds for a spanish investor?

Post by TedSwippet »

wenomeno wrote:
TedSwippet wrote:
HongKonger wrote:If you are a non US person living outside the US, you will also need to factor in the additional 30% withholding tax on all dividends from US stocks.
Spain and the US have a tax treaty, so the tax liability to the US would drop to 15% here. The US will apply this tax even where the investment is held in Spanish tax-deferred or tax-free wrappers.

Of more concern may be FATCA. This can add a new 30% withholding on the gross sale proceeds, not just the gain, from a sale of US situated assets. In that case the OP would need to file a US non-resident treaty-based tax return at the end of the year to recover the missing 30% of their original investment.
Thanks for your answer. As you say, there is a tax treaty, it works in this way, US IRS withhold a 30% of dividens, but give me back 15% in June when I fill my tax form.

I´ve never heard about FATCA, HongKonger doubts if there is for US citizens only. I´d like to clarify this point.
FATCA is an American domestic tax law that the US is attempting to apply extra-territorially (and winning no real friends in the process). It reverses the burden of proof, and forces all non-US financial institutions worldwide to assume all investors are US persons until they have proven otherwise. It also requires that many of these same non-US institutions contravene the local data privacy and non-discrimination laws of their own home nations. This makes it likely that many non-US banks will not (or will be completely unable to) become compliant with FATCA. Taiwan has already instructed its banks not to comply.

From http://www.americanthinker.com/2011/11/ ... onomy.html:
Let's suppose that a foreign investor trades stocks on a U.S. exchange, but his broker is FATCA non-compliant. One day he buys 10,000 shares of XYZ at $25 per share, and the next day, he takes advantage of a nice uptick of $1.00 in XYZ and sells at $26 per share. He makes a tidy profit of $10,000. But because his broker is non-compliant, the IRS now withholds 30% -- not of the profit, but of the gross proceeds of the sale! So the client now receives the sum of $260,000 minus 30%. The foreign investor is unhappy because his $250,000 investment has become $182,000. If he wants his money back, he must file a U.S. tax return.
And from a recent presentation at ABBL organized by Democrats Abroad, http://www.abbl.lu/news-publications/ne ... iabilities:
FATCA will also trigger a slow, yet massive divestment from the US. International financial institutions will gradually get rid of their US securities and divest entirely from the US market. Thus, contrary to what it hopes to achieve, FATCA will eventually reduce tax revenues for the United States.
Topic Author
wenomeno
Posts: 9
Joined: Fri Nov 11, 2011 12:53 pm

Re: European or US Bonds for a spanish investor?

Post by wenomeno »

Thanks for your explanation, if I´ve understood correctly I´m having no problems if i use an US broker such as TD Ameritrade (I like commission free ETFs). Anyway, currently when you buy US stocks you must fill a form, I don´t know if it´s something related to FATCA or with tax treaty. So, I think that there won´t be further problems.
HongKonger
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Re: European or US Bonds for a spanish investor?

Post by HongKonger »

wenomeno wrote:Thanks for your explanation, if I´ve understood correctly I´m having no problems if i use an US broker such as TD Ameritrade (I like commission free ETFs). Anyway, currently when you buy US stocks you must fill a form, I don´t know if it´s something related to FATCA or with tax treaty. So, I think that there won´t be further problems.
How did you get an account with Ameritrade or such like? Don't you have to be a US citizen to get one with the free trades otherwise the rates are very high? And yes - you do complete a form when you buy US stocks ...but due to FATCA, many banks outside the US won't give US people an account hence by being granted an account, it is already recognised you are non-US.
Topic Author
wenomeno
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Re: European or US Bonds for a spanish investor?

Post by wenomeno »

HongKonger wrote:How did you get an account with Ameritrade or such like? Don't you have to be a US citizen to get one with the free trades otherwise the rates are very high? And yes - you do complete a form when you buy US stocks ...but due to FATCA, many banks outside the US won't give US people an account hence by being granted an account, it is already recognised you are non-US.
I have not an account with TD Ameritrade yet. I think I can open one, maybe not in US but in UK. In fact, I´ve asked them, but they gave me no too much details. It´s possible that free trades be only fo US citizens, and UK accounts have no such advantages. For example Vanguard UK have €100,000 minimuns for its funds.

Then, I saw a lot of brokers and banks informing that they don´t accept US citizens as clients, and I supposse that FATCA won´t be a big problem for me, anyway the advice was no unappropiate.
HongKonger
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Re: European or US Bonds for a spanish investor?

Post by HongKonger »

wenomeno wrote:
HongKonger wrote:How did you get an account with Ameritrade or such like? Don't you have to be a US citizen to get one with the free trades otherwise the rates are very high? And yes - you do complete a form when you buy US stocks ...but due to FATCA, many banks outside the US won't give US people an account hence by being granted an account, it is already recognised you are non-US.
I have not an account with TD Ameritrade yet. I think I can open one, maybe not in US but in UK. In fact, I´ve asked them, but they gave me no too much details. It´s possible that free trades be only fo US citizens, and UK accounts have no such advantages. For example Vanguard UK have €100,000 minimuns for its funds.

Then, I saw a lot of brokers and banks informing that they don´t accept US citizens as clients, and I supposse that FATCA won´t be a big problem for me, anyway the advice was no unappropiate.
Out of interest I went ahead and looked around at the international arms of the US brokers. Have to say the costs were rather high compared to what you can get with local brokers who deal in US shares - at least out here anyhow (and they aren't especially cheap here). We have the same issue here about the minimums on funds (and on bonds), hence its an all ETF portfolio or high fees and high buy ins for me.

Good luck with everything!
bagle
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Re: European or US Bonds for a spanish investor?

Post by bagle »

Ramón,

There are Spanish-domiciled funds, such as Bestinver Renta, that invest primarily (90%) in German bunds. They have relatively low commissions (0.55%), avoid withholding tax issues for non-US residents, and avoid currency risk for Euro-based investors.
Valuethinker
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Re: European or US Bonds for a spanish investor?

Post by Valuethinker »

wenomeno wrote:
Valuethinker wrote:Wenomeno

If you are going to buy Euro bonds, stick with German ones at the moment, until the outcome for the European Currency Area becomes clear.

Netherlands would also be OK, probably. Not sure about Finland.

Inflation linked bonds are a good idea, but I think only France, Sweden, UK issue them? The UK ones are trading at negative expected real yield, and you have significant currency risk.

Swiss government bonds are obviously paying very little.

My overall thoughts would be something like:

- 60% German government bonds
- 20% Swiss bonds (norway is another favoured currency)- Switzerland, Sweden, Norway
- 20% 'other' bonds: either a diversified European government bond index (you'd lose if Italy/ Spain went down in the Euro zone, but you are getting a higher yield) or some kind of global government bond fund

FWIW Euro zone stocks (ex financials) are probably cheap. That is irrelevant until the Euro Zone issues are resolved-- the market won't exploit that cheapness because of the event risk of an uncontrolled Euro meltdown.
Hi Valuethinker,

at the moment I´m going to do nothing. I still have not a well-defined plan. About to invest in Swiss and other countries bonds, there is a problem with investment vehicles. I mean, there are some ETFs with German, Australian or Canadian bonds, but I don´t find anything good for other countries. There are a couple of brokers in Germany for buying bonds directly, Vitrade and Dab Bank, and they are an option, but I think that with a small amount to invest a fund or ETF is a better idea.

On purpose, right now, spanish bonds are a quite safety option because Goverment modified Constitution and Public Debt payment has priority over any other Gov Spent ans Social Security funds are invested in Public Debt too, so I think that is enough guarantee. The point is that this high yields are consequence of the crisis and in the long run I think that spanish debt is going to performance like emerging markets debt.

regards
I believe we are in gotterdamerung (twilight of the Gods) for the Euro. The ECB is funding a 'carry trade' where they lend money to the banks who invest it in sovereign debt at a higher yield.

It will all end badly. The combination of fiscal contractionism and orthodox monetary policy is not a pretty one under conditions of deflation. The Hungarian situation is a warning, and Berlusconi lies in the wings, waiting for his moment. The 'rule of technocrats' will not last in Europe. The right wing populists are close behind and the tradition of right wing populism in Europe is *not* orthodox on economic policy. As in Britain in the 1930s, a right wing government will get elected, and then devalue the currency (as the National Government did in 1931).

Will Spain hold? I don't know much about particular constititutional and structural issues, but this is a crisis throughout the Euro Zone and beyond. I am sure Germany will make good on its debts, I am pretty sure Denmark, Finland, Netherlands will. Can't think of too many other countries I feel safety about. or rather, they will find a way to suspend their Euro membership and inflict significant currency losses (if not outright default) on their members.

Whilst I can make a case for equities in this (many strong European companies, if not financials then exporters etc.) betting that the bond market has got the 'right' price for Spain strikes me as a hard one. You are closer than I.

With sterling bonds you will have currency risk, but I am fairly certain we will honour our debts. Even the possible breakup of the Union with Scotland won't fundamentally compromise that issue. However if/when we get booted out of the EU, it won't be pretty for the British Pound.

Whether the bond market has 'correctly' priced the event risk of a Euro meltdown I just don't know. What the ECB has done strikes me like every other 'solution' to this crisis: ignoring the plain facts (about the impacts of competitive fixed exchange rate devaluation) and whilst it might have restored confidence 6 months ago, by now it is too little and too late. In 1992 we were forced out of ERM and then Spain was forced out-- the whole thing became unsustainable. This is a rerun.

So:

- spread your risk as much as you can across the Euro zone
- safety over return (in bonds)
Snowjob
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Re: European or US Bonds for a spanish investor?

Post by Snowjob »

not sure what your options are for funds, but maybe you could by US government bonds (we have the printing presses and have shown the willingness to them) through a mutual fund that hedges the currency risk back to the euro. You might pay a higher fee for this but if your main objective is to have a 0 credit risk, uncorrellated asset with no currency risk I think this might be the way to go untill your side of the pond gets things straitened out.
Topic Author
wenomeno
Posts: 9
Joined: Fri Nov 11, 2011 12:53 pm

Re: European or US Bonds for a spanish investor?

Post by wenomeno »

Thanks everybody for answers.

Valuethinker, as I said in a previous post, I´m not investing right now. I´m designing my long run portfolio. I think that euro will survive this crisis and that´s the reason I´m asking for euro bonds. But I´m asking under a long run point of view. So thanks for your wise advisory, but it´s no matter of worrying too much with eurozone problems. :sharebeer

Then, there are practical problems with Dutch or Norwegian bonds. It´s hard to find and ETF or fund to invest in. You can buy bonds directly, but you need a lot of money for making a diversified portfolio. In fact it´s even hard to find a German long term bond fund or ETF. The same problem with US bonds currency hedged (at least at low cost with no sustancial decline in return).

Finally, Bestinver Renta is a short term bond fund. If I´d need such asset it be a good option, but I´m looking for another thing.

So, currently my preferences are VWO and BUND (ETF from Pimco) or iShares eb.rexx Government Germany 10.5+ DE, but I must find a broker with these two available.

P.D.: I´ve written to TD Ameritrade US, they answered that Spanish adressed can´t open an account with them at this moment.

Regards, and thanks for all, I´m happy for joining this community :sharebeer
quez
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Joined: Tue Aug 28, 2012 5:46 am

Re: European or US Bonds for a spanish investor?

Post by quez »

Wenomeno, you can try Interactivebrokers.
I'm portuguese and I have an IB account.
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