Degiro ETF investing questions from a beginner

[dpkgreg]

Hello everyone. I just created a Degiro account, and would like to start investing. I live in Switzerland.
I read up on some details, but I still have some simple questions, that I would like to clarify.

My goal is long-term investment into simple, diversified index funds, like the ones vanguard offers.

Here are my questions:
I chose a custody account because the basic one enables them to lend to third parties. Now, I read that this shouldn’t be a problem if your portfolio is not heavy on dividend-paying funds. I read that Vanguard funds usually pay out dividends.

What is the benefit of a fund that pays dividends?

Secondly, which index funds are there that don’t do that, so that I may avoid paying the dividend fees?

Thirdly, if I ever do want to invest into stocks and use options, futures etc, I should always be able to just create a new account and choose a basic profile, right??

Thank you so much for your time!

[dbu]

@dpkgreg

Secondly, which index funds are there that don’t do that, so that I may avoid paying the dividend fees?

Even if you pick the accumulating ones (vs. distributing ones) the “reinvested dividends” will need to be taxed too - afaik.
I believe reporting it for tax authorities is a bit simpler with regular distributing funds than with accumulating ones.

[Patirou]

This is correct, especially important is that these accumulating funds are reporting to the ESTV (can be checked on justETF)

[SwissMousse]

With DeGiro, a limited number of ETFs is free to buy once a month.

The most obvious and usual choice is VWRL (Distributing).
The only one somewhat similar that is Accumulating and still free to buy is IWDA, but that has no Emerging market parts.
But as said above, Accumulating is not having advantages in Switzerland.

[Patirou]

Actually it could have an advantage with Degiro. AFAIK Degiro is taking a percentage of dividends. Has to be checked since I use IB

[mabi]

I confirm, DEGIRO has what they call a “Corporate Action Fee” which they take on the dividends payout. I have asked their support directly in the past exactly about that because I was surprise (didn’t fully read the fine print I guess) and they answered me:

“This fee is a dividend processing fee. The fee for processing dividends is EUR 1.00 + 3.00% of dividend (maximum 10%).”

[SwissMousse]

Yes, that fee for dividend costs exists, however only with a custody account.
In any case, DeGiro has been taken over by Flatex - to be honest, I expect a change of the cost structure in the near future, and I am not sure if they stay away from a custody fee.

[dpkgreg]

Wow a lot of interesting and useful stuff, I need to ask further though:

Why would an accumulating ETF not have any advantages in Switzerland?
Why is reporting accumulating funds more complicated?

Thank you for your answers!

[clon]

@dpkgreg

Why would an accumulating ETF not have any advantages in Switzerland?
Why is reporting accumulating funds more complicated?

I prefer accumulating ETFs as I don’t face the hassle with reinvesting dividends… And as long as the accumulated (reinvested) dividends are transparent e.g. easily determinable with https://www.ictax.admin.ch/extern/en.html#/search there is noting “more complicated” IMHO

[San_Francisco]

@dpkgreg

Why would an accumulating ETF not have any advantages in Switzerland?

You don‘t (legally) avoid paying taxes.

A purely distributing ETF will - after the costs of trading and running the fund have been accounted for - distribute all of its dividends and you‘ll be taxed on the distribution.
A purely accumulating ETF will - after the costs of trading and running the fund have been accounted for - calculate the amount of reinvested dividends per share and report it in their filings and/or to tax authorities. Which in turn will tax you on that amount.

Put differently, even though the dividend distribution of the accumulating fund is only a „virtual“ distribution, you’ll have to pay taxes on it nonetheless.

So you possibly got the idea of investing in a fund that doesn‘t report these numbers? Well, you‘ll might want to figure the numbers yourself then.

[Patirou]

@San_Francisco

So you possibly got the idea of investing in a fund that doesn‘t report these numbers? Well, you‘ll might want to figure the numbers yourself then.

If I remember well, I think if the fund is not reporting on ESTV, some tax offices might take the full capital gain on a year to calculate tax. Could not find my source again though.

[Architect]

Hello.
Please allow me to recover this thread. I’m new here.

I also live in Switzerland and I started very recently with a custody Degiro account. I would like to invest in ETF for the long-run and some stocks (with maybe 20%/30% of the portfolio). Regarding ETFs I found several points of view on accumulating versus distributing ETF and I’m finding hard to understand which one is the more optimal (performance and costs). It seems to me that some well known bloggers MP, Mr.The Poor Swiss, and MrRip advocate for distributing in Switzerland (?).

Some facts (let me know your remarks):

• Distributing ETF make taxes in Switzerland easier because the earnings are clear.
• Reinvesting those dividends, a distributing ETF will have the same performance as a similar accumulating ETF.
• To reinvest the dividends, there are the broker’s fees when buying new postions, but this happens also with an accumulating ETF with a periodical investment plan. One can chose a free ETF at Degiro’s but sometimes the TER is higher (making this option not that interesting in the longterm).
• Distributing ETF’s seem interesting in the future because it would be like a second income, and one wouldn’t need to sell positions (or at least not all) to have that extra income.
  BUT
• Degiro’s custody account has a dividend processing fee as stated above (if I understood this fee is the minimum of: 1 euro + 0,03% or 10% of the dividend…)

Do you have any comments on this?
Is it smarter to open a new basic account at Degiro’s to espace the Dividend processing fees? (but the risk related to the lending to third parties, for small amounts maybe bearable, but in the long term, with bigger amounts, one questions this option?)
Any alternative brokers to avoid the dividend fees?

I would like to understand which is the best strategy in a long term perspective. I hope it’s not too blurry.
Thanks!

[Dr.PI]

Well, first you have to decide what is your investment basket and chose funds accordingly.

Long term most important are yearly recurring fees, which are fund TER and custody fees of the broker. Then you have to calculate transaction fee for each purchase and look at it. Personally I am fine with 0.5% transaction fee, but other people here want to push it really low.

Dividends or accumulation is not critical at all.

[Yanikuza]

@Architect

Distributing ETF make taxes in Switzerland easier because the earnings are clear.

Well, not really, if you don’t want to calculate how many your accumaleted ETF did, you can just look at the ICTax - Income & Capital Taxes (admin.ch) to know the amount of the distribution (the link will show you the dividend for the iShares Core MSCI World UCITS ETF). You just have to put how many position you have before the date of distribution and at the end of the year to know how many dividend you “had” and the value of your asset.

@Architect

Reinvesting those dividends, a distributing ETF will have the same performance as a similar accumulating ETF.

Yes (nothing to say more here).

@Architect

To reinvest the dividends, there are the broker’s fees when buying new postions, but this happens also with an accumulating ETF with a periodical investment plan. One can chose a free ETF at Degiro’s but sometimes the TER is higher (making this option not that interesting in the longterm).

It depends on you to decide how much a TER is expensive. For exemple, I consider a TER between 0.03% and 0.25% cheaper, above it could be expensive depending on which kind of ETF you chose. For exemple, an ETF like ARKK have a TER of 0.75% but during the rush of 2020, this ETF performed really well so the fee wasn’t really expensive in comparison of the earning you could made.

@Architect

Distributing ETF’s seem interesting in the future because it would be like a second income, and one wouldn’t need to sell positions (or at least not all) to have that extra income.

It is, imagine having enough position to earn for exemple 20’000 CHF every year as an extra income in addition of your retirement plan ? It is quite confortable

@Architect

Degiro’s custody account has a dividend processing fee as stated above (if I understood this fee is the minimum of: 1 euro + 0,03% or 10% of the dividend…)

This is exactly why I, personaly, didn’t chose this broker. The others reasons are that you have a 100’000 EUR of guarantee for your cash, but only 25’000 EUR for your investment… and that you can’t invest in US ETFs.

@Architect

Any alternative brokers to avoid the dividend fees?

You have plenty of broker for that, the most popular in this forum are: Interative Broker, Swissquote, Postfinance E-Trading. You can also maye consider FlowBank which is kindly new but could be interesting if you aim to invest a lot of money 2x, 3x, 4x per year as their fees for big amount are better than Swissquote.

[Architect]

Thank you for the feedback. I think I will need to do a small excel sheet to test those scenarios. As for the ETF, maybe just have 2 or 3, max TER 0,2. And open exceptions only for specific funds. To test (past performances) I used https://backtest.curvo.eu The Buffet scenario is still unbeatable.

Mr.The Poor Swiss also drew some scenarios here DEGIRO Vs Interactive Brokers For European Portfolio: Who Is Cheaper In 2021? - The Poor Swiss

This is a strange but funny feeling, when starting this type of investments one wants to do everything right and specially optimise costs in the long run.

[Architect]

Thanks for breakdown the Q&A of my post. Really useful insights.

@Yanikuza

It is, imagine having enough position to earn for exemple 20’000 CHF every year as an extra income in addition of your retirement plan ? It is quite confortable

I don’t have enough experience (yet!) so I can’t imagine how much zeros of investment one would need to get 20k of dividends each year.

@Yanikuza

The others reasons are that you have a 100’000 EUR of guarantee for your cash, but only 25’000 EUR for your investment… and that you can’t invest in US ETFs.

What are the securities/guarantee with Interactive Brokers regarding cash and regarding investments ? I didn’t find this info online.

@Yanikuza

Interative Broker, Swissquote, Postfinance E-Trading.

Thanks for naming. I read about Interactive Brokers but I hesitated specially because of the custody fees 120USD. I’m not sure I can reach 100k in a near future (aka 5y). Maybe with a scenario with an investment of 1k a month, I would need 8y (excluding earnings). So 8 x 120chf = 960chf. Not sure these are “peanuts” taking into account the big picture. Maybe just a bit of math would help me to compare all the fees between Custody at Degiro’s and IB (then I’m still trying to understand the Fixed versus Tiered.)

These first steps are always hard. More information is great, but the over-thinking can paralyse Thanks once again @Yanikuza

[dbu]

@Architect

custody fees 120USD

This is not entirely correct.
The 10 usd/month of those fees serve as “credit” for your transaction fees.

So lets say each month you exchange X chf to usd to purchase 2 usd ETFs.
That would likely amount to 2 usd for forex + 2x 0.33 usd for transactions = 2.66 usd of fees.

Your monthly “custody” fee charged would be 10-2.66=7.34 usd.

Now compare to other brokers, and take into account the potential switching (fees) of positions you might do once you do reach 100k.

[Yanikuza]

@Architect

I don’t have enough experience (yet!) so I can’t imagine how much zeros of investment one would need to get 20k of dividends each year.

A lot

@Architect

What are the securities/guarantee with Interactive Brokers regarding cash and regarding investments ? I didn’t find this info online.

Not sure about this information now, but I read somewhere from the mustachianpost blog that it was about 250’000 USD as there is an agreement between UK and USA.

@Architect

Thanks for naming. I read about Interactive Brokers but I hesitated specially because of the custody fees 120USD. I’m not sure I can reach 100k in a near future (aka 5y).

As always, it will depends on how you consider this fees like fees. For exemple, if you earn every year during 8 years 200 USD as dividends, you can say that you are using IB for free (of course this is not the case). But comparing to swiss broker, you will not spend that much. Look at here: What Is The Best Swiss Broker In 2021? - The Poor Swiss

Make an excel to summarize how much you will spent in a year to buy your ETF(s) and then decide by yourself if you are ok with Swiss broker fees or not.

I asked myself this question and I chose IBKR even if I will reach the 100K in 2-3 years. First of all, I wanted a swiss broker for “security” but when you compared the broker, not sure if Swissquote (for exemple) is really better than IBKR in term of security. But this is strictly personal In the future, I will probably have a swiss broker when I will not care about cost or when Swiss broker will be cheaper (and it’s starting).

[Architect]

@Yanikuza

Not sure about this information now, but I read somewhere from the mustachianpost blog that it was about 250’000 USD as there is an agreement between UK and USA.

I also read recently the same info not stil haven’t found it at IB.

@Yanikuza

Make an excel to summarize how much you will spent in a year to buy your ETF(s) and then decide by yourself if you are ok with Swiss broker fees or not.

You’re totally right. Funny enough, I read that today, march 25th, was declared International Procrastination Day I really need to do it.

One last question related to currencies. IB is better when buying ETF in USD or EUR compared to Degiro? Or the best option is to go for ETF in CHF (independently from broker) ?