Buying USD in CH online

Ok, but these are not quite the same ETFs, these are different products. The way they work is they buy the same stocks plus some positions to cancel out currency effects. The net performance that you should get from it in its source currency is the performance of the target index in its target currency +/- hedging costs - TER.

AFAIK, hedged ETF usually use 1-month forward currency contracts. The cost theoretically should be more or less the difference in 1-month risk-free interest rates (like LIBOR or government bonds), plus some minor transaction costs. Let’s look at LIBOR rates, it’s easy to lookup: CHF libor has been glued to about -0.7%, USD libor increased from 0.4% early last year to 1% as of recently => CHF/USD hedge used to be free or even earned you a little bit, but now it’s definitely gonna cost you. Are you ready to pay extra to hold, what your central bank openly believes, an overvalued currency?

A problem with hedging for equities is that it still doesn’t completely eliminate currency risks. S&P 500 has, like, half of revenues from abroad in various currencies. Strong dollar => lower revenues from abroad => weak S&P => your loss with hedging. Revenue is not 100% predictable, and what complicates it even further is that companies may themselves have hedged some of it in various ways that nobody else will have a clue about, so your ETF fund manager will just do the simplest thing possible: hedge their stock prices. This problem doesn’t exist for bonds however, there the cash flows are predicable and hedging actually makes perfect sense, but you need to consider its full costs and whether they’re worth it to you.

Edit: sorry calculated wrong, negatives rates are hard. 1% - (-0.7%) = 1.7% in favor of USD, so hedging was and is still batshit expensive, you’re trading currency risk for guaranteed fixed loss

2 Likes

By the way, transacting Swiss exchange products in IB is more advantageous, as you don’t seem to pay Swiss stamp tax (at least I wasn’t charged for it today). That easily reduces your costs by half.

1 Like

Yes, that’s correct. By law, swiss stamp duty is charged only if you buy through a swiss intermediary
https://www.admin.ch/opc/de/classified-compilation/19730173/index.html#a13

4 Likes

@hedgehog, Thanks for the explanation! Dude, you know so much about this. You should write a blog as well! :slight_smile:

Hey Guys, one more question about the transaction costs. How to check the cheapest exchange to buy iShares MSCI World ETF in USD using IB? Before I opened IB, I bought it on SIX using CT. But I can see on justetf.com, that it’s listed in USD also on London Stock Exchange. Which one is cheaper?

Update:

It’s even more crazy. If I search for SWDA ticker, I got this:

If I search for IWDA ticker, I got this:

Anyone has an idea which should I choose?

Update 2:

It seems that IWDA:LN has a bit better results than SWDA:SW:
https://www.bloomberg.com/quote/IWDA:LN

It is exactly the same ETF, so I suspect that difference in performance is due to transaction costs. Thus it seems that London Exchange is cheaper.

American exchanges are the cheapest. European ones tend to be 1-2 orders of magnitude more expensive, and some (like LSE) will also hit you with a hefty stamp duty, although it seems to be now charged only for plain vanilla stocks, not ETFs.

I bought $100k worth of VTI paying less than $3 in fees in total. On BYX + ISLAND + IBKRATS according to my brokerage statement. BYX (BATS) is especially cheap, they reward you for removing liquidity, i.e. if you place an order that can be immediately matched with someone from the order book, like buying at market price.

Here (some details photoshopped out, but the rest are real numbers):

SWDA/IWDA are European UCITS-style ETFs, not traded in US. An example of a US-based MSCI World index tracking ETF you can buy is URTH, but I’d rather buy a much more liquid and lower cost VT. It’s from Vanguard, which is IMHO a bit more reputable and generally less greedy than Blackrock (iShares). Here’s a list of some global funds: http://etfdb.com/etfdb-category/global-equities/. Look out for most liquid (high AUM) and low cost (TER) funds. Note that they are not all the same and track different indexes. Small caps and EM are often the main differentiators. MSCI excludes EM for example, MSCI World + EM would be MSCI All Country World.

Buying a US-based fund instead of EU is also beneficial from US dividend taxation perspective. A disadvantage could be US inheritance taxes, but for swiss residents that’s a concern starting from a net worth of several millions thanks to US-CH estate tax treaty.

Also, in the above dialogue IB is actually asking you not for exchange (it’s “SMART” - auto selection), but rather for exact product type. AMB:IWDA is traded in EUR, and LSE:IWDA is in USD, LSE:SWDA in GBP, that’s the difference. IB should route your order to cheapest exchange(s) automatically, but can’t make the decision for you which of these three currencies you want. Look at https://www.interactivebrokers.com/en/index.php?f=1563 or https://pennies.interactivebrokers.com/cstools/contract_info/ for details on specific IB symbols

7 Likes

Thanks @hedgehog for help. Now I understand. Investing in US-based ETF is really tempting, I’m only wondering what are the tax implications of that. Mr. @_MP says that you shouldn’t invest more than $60k in VT:

“I will invest up to CHF 60’000 maximum into this ETF because afterwards, the US estate law makes your heirs lose 40% of the amount invested into this fund. I will then switch to the Ireland based ETF Vanguard FTSE All-World UCITS (another option could be iShares Core MSCI World UCITS with its larger fund volume, but I prefer Vanguard that tracks the FTSE index, as it includes emerging markets).”

This is only a concern for your next of kin if you die before you manage to get rid of the US assets. Which in case of stocks you can do, like, every business day.

Then as I already said, US and Switzerland have an estate tax treaty which lifts the exemption for swiss residents from $60k to the exemption limit for american citizens, which is about $5M at the moment. We had a thread on this forum with some more details. So I’m fairly certain there’s no need to worry about it until your total wealth approaches a few millions, and then you can afford lawyers to ask about it and how to avoid it (through trusts maybe)

Also, no next of kin that you care about - no problem

3 Likes

Ok, sounds reasonable. One more question - why VTI and not VT? :slight_smile:

It was just an example about trading fees. I have VTI and VEA as my two biggest passive holdings at the moment. Slightly cheaper in terms of TER than VT, and no EM - i’m pessimistic about China.

Vanguard has ETFs for particular market segments, you can mix and match however you like.
https://www.bogleheads.org/wiki/Approximating_total_international_stock_market (this page talks about their US mutual funds mainly, but each usually has an ETF equivalent as well)

4 Likes

Hi, I have another problem. I’m trying to buy some USD following Mr @_MP’s instruction, and I get following warning:

I’m not sure what is a reasonable price that I should put in the LMT to exchange the USD asap.

Ok, I’ve used the price that Google showed me:
https://www.google.ch/search?q=1+usd%2Fchf&oq=1+usd%2Fchf&aqs=chrome.0.69i59j0l5.2840j0j7&sourceid=chrome&ie=UTF-8

Then, I’ve just hit “Accept and Continue”, and then I got this:

Next, I’ve got a warning that my transaction won’t be executed until today 17:00 - hit OK. (By the way, do you know what’s the cause of the delay?)

And next warning:

Hit OK again.

Now I see the order and I’m waiting for execution:

Now I will wait a bit (to ~18:00), and if it won’t work, then I’ll hit “Cancel” and try different price. I’ll let you know if it works. Please also let me know what are your experiences with currency exchange.

I think I know what is the problem. When I clicked “Decline” first time it switched back from “FXCONV” to “IDEALPRO”. Now, I pushed “Cancel” and I’m waiting for the order to get canceled. At the moment, the status of the old order is “Cancel requested” and I can’t make a new order with “FXCONV” because it says that I don’t have enough cash.

Ehh… CT was way easier to handle. :confused:

Update:

No, it was actually FXCONV:

Anyway, now it’s still in status ‘Cancel requested’. If I won’t get the money back today, I’ll have to call them tomorrow. Damn, IB interface is really confusing. CT is so much easier.

Market’s closed, it’s weekend

And pay 0.5% in commission? No thanks

1 Like

So they will cancel it when the market will be opened? It doesn’t make sense. I should be able to cancel that order anyway.

It’s actually 0.2% commission + 0.5% for currency exchange.

I don’t know, I try to never trade outside of market hours, at market open and close - it’s too volatile usually

In any case even if the order goes through you’ll only lose a couple of bucks in commission +/- market risk.

1 Like

Ok, thanks for the info. I’ll wait to tomorrow then. By the way, which exchange opening time do you mean? NYSE? So according to this wiki article it’s basically 15:30-23:00 (UTC+2h - for summer Central European time zone)?

It depends on whatever asset is it that you’re trying to buy

Most currency pairs can be traded 24 hours a day, but only on business days

Stocks - depends on exchange.

2 Likes

So at what time do you usually buy VT? 15:30-23:00?

Sometime intraday. I’d avoid especially market open, first half an hour or so, too volatile. Market close can also be volatile, but less.

1 Like