Disperse cluster risk from VT and IB

Currently I have almost 1/2 of my total net worth (including 1st and 2nd pillar) invested in VT at IB. Despite trusting VT and IB I still think this is a big cluster risk. It’s one broker, one ETF/emittent/domicile.

So my idea is to sell VT and use about 1/2 of it to buy VTI. Then I want to transfer the rest to another broker and buy an all-world ex-US ETF of another emittent and with another domicile. So the basic idea is to split the VT in two disjunct parts (different broker, country, emittent, domicile).

What are your thoughts about this, is it a good idea? So far I’m not sure about which broker to use, probably Degiro would be good, what do you think? Also I have no idea which ETF to buy.

Was discussed quite intensively, also recently. Look also for finpension/VIAC discussion.

Doesn’t exist but doable. You need Japan + Europe + Asia-Pacific ex Japan + Emerging Market + Canada (?).

I am kind of on the way to write down some facts and thoughts exactly about it.

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Good luck. :smiling_imp:

If you don’t care too much about small cap and emerging markets the solution is as simple as getting the following HSBC MSCI World UCITS ETF USD ETF on DEGIRO which tracks the MSCI World index:

I mention DEGIRO here because this ETF is on their list comission free ETFs for which you don’t pay any transaction fees. Note that you still need to pay the FX fees to convert from CHF to USD.

If you do care about emerging markets (all world index) the other next choice would be Vanguard FTSE All-World UCITS ETF (USD) Accumulating ETF tracking the FTSE All-World index but then you are again with Vanguard as ETF provider and you want to diversify that too in the best case. The Vanguard ETF has a TER of 0.22% whereas the HSBC ETF has a TER of 0.15%.

It’s also a commission free ETF at DEGIRO and actually I was thinking of doing something similar myself as soon as I judge that I have “too much” assets at IB.

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Thanks for your suggestions! If I understand correctly, those are not ex-US ETFs, right? So there are no good All-World ex-US ETFs that are not domiciled in the US? I wonder why, am I trying to do something strange?

I thought it would be efficient with regard to witholding tax to hold US in an US domiciled ETF and the rest of the world in an Irish one.

But anyway, if that’s not possible, I guess the next best option is to have different All-World ETFs with different emittent and domicile on IB and Degiro and split it in half. What do you think? Basically my goal is to be as diversified as possible while still staying cheap and simple.

That’s right these are world/all world ETFs which include US, in fact US is the biggest part of it. As far as I know if there are ETFs which are ex-US they would not be called “world”. You could use an ETF screener/search to find ETFs matching your criteria such as at justetf.com or etfdb.com.

Not sure about that point, maybe someone else knows better?

I like that strategy but that’s my subjective opinion :wink: I am too lazy to manually buy multiple ETFs covering each continent, this generates quite some work for example just by having to rebalance among all these and additional transactions fees.

Kind of, yes.

European ETFs are primarily marked in Europe (EU) - where a personal investor is unable to buy American ETFs. On the other hand, most “World” investors are unlikely to include the US. Japan is a notable exception - but that’s because “it doesn’t quite fit in” with other Asian countries.

It is - or would be - a very niche product in Europe.

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I played around with justETF and compared some ETFs (without having much knowledge). The recommended HSBC-ETF looks good to me. I guess, for emerging markets I could still buy VWO.

So the current plan is to open an account at Degiro and invest 1/3 of my VT in “HSBC MSCI World UCITS ETF USD”.

Does this sound reasonable, or am I missing something important?

First, you will have to swallow around 12-14% of withholding taxes on dividends paid to the fund. The number is from annual reports of various MSCI World funds, I am going to write in this forum a detailed summary later.

Second, you can consider opening a european degiro account and fund it with preexchanged Euro.

I played with ETF ranking at https://www.trackingdifferences.com/. Based on 3Y and 5Y performance, the best “developed market” ETFs is indeed HSBC MSCI World.

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Huh.
MSCI World is complemented by MSCI Emerging markets, which includes South Korea (13-14%). VWO follows FTSE and does not include South Korea, but includes Hong Kong, which is in MSCI World. So you get quite a different exposure. So you need MSCI Emerging Markets ETF, such as IEMG, instead of VWO.

Thanks @Dr.PI for the hint. I am very interested in reading more about this 12-14% WHT because I don’t quite understand exactly why I would not get this WHT back with the HSBC World ETF in DEGIRO as I would with VT in IB.

The Irish-domiciled fund is not transparent to Uncle Sam for U.S. dividends.

Uncle charges withholding tax just once - but on different “layers”:

US-domiciled ETF:

  • Dividend distribution from U.S. company to US-domiciled ETF: 0% WHT
  • Dividend distribution from US-domiciled ETF to investors (generally): 30% WHT
  • Dividend distribution from US-domiciled ETF to Swiss-resident investor claiming treaty benefits with W8-BEN): 15% WHT
  • Dividend distribution from US-domiciled ETF to Swiss-resident investor claiming treaty benefits with W8-BEN) through Swiss paying agent (additional layer & tax withholding): 30%

LU-domiciled ETF:

  • Dividend distribution from U.S. company to LU-domiciled ETF: 30% WHT
  • Dividend distribution from LU-domiciled ETF to investors: 0% WHT

IE-domiciled ETF:

  • Dividend distribution from U.S. company to IE-domiciled ETF (reduced from 30% through tax agreement): 15% WHT
  • Dividend distribution from IE-domiciled ETF to investors (non-Irish residents, holding in recognised clearing system): 0% WHT

You can’t get something back from 0%.

And the European fund can’t reclaim U.S. WHT from Uncle Sam, since they can’t (satisfactorily) guarantee to Uncle Sam who you are and that you qualify for treaty benefits …unless the fund is a special “pension fund” fund (which we’ve been discussing elsewhere) held by qualified investors such as pension funds or in 3a accounts.

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To be nitpicky, it’s true of ETFs but not of funds in general. AFAIK there are a couple of countries that have local funds with treaty benefits (and are not pension funds). At least NL is that way, iirc Spain has some too?

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While I don‘t know about any retail that do so, it wouldn’t surprise me:
A non exchange traded fund is in a much better position to „know“ its investors - or restrict availability.

As I understand it, it’s not about any guarantees. There is simply nothing to reclaim from the US. The IE-domiciled ETFs already get the reduced WHT of 15% due to the US-IE treaty. Those 15% can never be reclaimed from the US, as far as I know.

For US ETFs where you get the 15% back via DA-1, you get that money from Switzerland, not from the US. I.e., with DA-1 you effectively get a Swiss tax credit for the taxes you paid to the US to avoid double taxation.

Switzerland doesn’t hand out tax credits for the indirect case of foreign WHT paid by (IE) ETFs

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That’s only for the US withholding taxes, right? That’s why I was looking for an IE domiciled ex-US All-World ETF. So I could still have the US part of my portfolio in an US domiciled ETF and the rest in IE.

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