Exchange Rates when buying USD-ETFs at SIX with CHF broker/CHF account

[Monsieur_Charles]

Dear Mustachians

I have been reading this forum for a while with great interest, but now I have a question myself, which I am sure you will be able to help me with:

What are the foreign exchange costs related to buying ETFs that are traded in USD at SIX when purchasing with CHF? Does the broker exchange the CHF to USD at the interbanking rate or would brokers charge me an unfavorable exchange rate?

Assumption would be a Swiss broker (SQ or CT) and only a CHF account (no USD account linked to broker). ETF could for example be SWDA traded at SIX in USD only.

For CT I already saw that there is a 0.5% exchange rate fee (horrendous!) on such transactions, but I’d at least expect that the purchase be done at interbanking rates.

Anyone has some experience with this issue? Any if (as I suspect) Swiss brokers are really using such transactions to make big money off their clients, what could be a possible way around it? Opening a foreign exchange account at the broker and feed this account via Transferwise?

Disclaimer:
I know by now most of you use IB/De Giro, which must be more favorable regarding exchange rates. But I would like to specifically know, how Swiss brokers such as SQ or CT are faring in this regard, so please no „switch to Ib“-comments

[rolandinho]

At Sq - 0.95% until 50k, see table in post below.
Even if it’s directly for buying an ETF, the fee is due.
At least the interbank rate is used though.

Interactive Brokers: Brexit account migration = insurance drops from 500k USD to 20k EUR

Again? We had this all before… recently, no? I can only speak for Sq and Pf. Fx - see attachment (Sq & Pf are the same) 30% Yes, of course. - 15% wht (is a credit for your Swiss tax, DTA) + 15% rückbehalt USA (gets refunded) [Screenshot_20200929-121336]

I’m not aware of any way around it, via Transferwise may be an option, I just don’t think anyone has mentioned that which makes me assume there’s a catch. Tw is not free for a start and does also cost approx 0.5%.

[Cortana]

Couldn’t you transfer the assets to Neon or Revolut and then as USD to SQ?

[San_Francisco]

@Monsieur_Charles

What are the foreign exchange costs related to buying ETFs that are traded in USD at SIX when purchasing with CHF? Does the broker exchange the CHF to USD at the interbanking rate or would brokers charge me an unfavorable exchange rate?

Three questions, one answer: It depends on your broker. It isn’t the exchange that’ll magically convert it for your.

@Monsieur_Charles

there is a 0.5% exchange rate fee (horrendous!)

Come on, 0.5% is far from horrendous from a consumer perspective?!
Where can you get lower rates? Or expect to do so?
(Not saying you absolutely can’t).

@Monsieur_Charles

but I’d at least expect that the purchase be done at interbanking rates.

Why or how exactly are you as (presumedly) a small retail customers expect to get interbank rates as traded between big banks?

@Monsieur_Charles

Opening a foreign exchange account at the broker and feed this account via Transferwise?

If you call 0.5% surcharge “horrendous”, TransferWise will only marginally make you better off with their 0.4% or so fees - but incur additional bank transfer costs.

[Monsieur_Charles]

Thanks you everyone for the answers, a lot is clearer now.

To summarize: for SQ/CT the currency exchange fees are 0.5% (CT) and 0.95% (SQ), but the interbank rate is used. I feared that banks might even use unfavorable rates on top of these percentages.

I guess as @San_Francisco points out, this is not a as bad of a deal as I first thought. Indeed any circuvention via Transferwise or the like would lead to similar fees (0.43%). Maybe for SQ users it could make a difference though.

So, how do I get around this problem? I see two solutions:

Buying ETFs that are traded in CHF
Could buying a MSCI World ETF that is traded in CHF (f.e. UCTIS) be a solution? Prima vista, these ETFs have slightly higher TERs, but are there any other disadvantages?

Using other brokers
As I understand, the brokers preferred by the Mustachian community (IB and DeGiro) would not charge such high exchange rate fees (correct?).

[Patirou]

Please have a look at this blogpost from Finanzwesir. There is a graph at the end which shows what happens with 0, 0.5, 1.5 and 2.5% purchasing costs, with a monthly savings rate of 900 €.

Leserfrage: 900 € in diese drei ETFs? | Finanzwesir

What I would take is, that buying costs are by far less important than TER, and actually, just chill about the 0.5% transaction costs…

Reason for this : the transaction cost are just a one off cost on your investment (of 0.5%), with a possible return of about 100% every 7y with an expected return 7% p.a. The TER however is charged every year on the total invested money (not only on the newly invested), therefore it is compounding at a much higher rate.

[San_Francisco]

Just to be clear, I wasn’t saying 0.5% or 0.95% was cheap. A stock broker should have access to “cheap” currency conversion themselves. It’s not what I’d call “horrendous”, that’d be way above 1%. I believe I’m paying 1% myself on a securities account I have with a traditional bank.
TransferWise is providing a “retail” pricing - since they are (mainly) in the business of cross-border payments to third parties, they have a lot more bases to cover in terms of costs and compliance. So you might still call their pricing inexpensive for what they do.

@Patirou

What I would take is, that buying costs are by far less important than TER, and actually, just chill about the 0.5% transaction costs…

Reason for this : the transaction cost are just a one off cost on your investment (of 0.5%)

I concur (at least for long-term investments).

Also, you might chalk it up as the costs of the convenience and peace of mind you get from having a domestic account.

[Cortana]

0.5% buying costs and 0.5% TER have a totally different impact on longterm returns. If you buy 2000CHF/month and we assume 6%/year return before costs. After 20 years:

No TER/costs: 907k
0.5% buying costs: 902k
0.5% TER: 858k
0.5% TER + 0.5% buying costs: 853k

[Neville]

@Patirou

Please have a look at this blogpost from Finanzwesir.

You forgot the link.

[Monsieur_Charles]

I get your point with TER/compounding effect being more important than the 0.5% currency exchange fee. I guess it depends on the time horizon really (which of course for most of us is rather long). Bear in mind though that the 0.5% will apply a second time, when selling the ETF.

@San_Francisco

Also, you might chalk it up as the costs of the convenience and peace of mind you get from having a domestic account.

For sure. Everyone confronted with this problem has to be willing to pay a bit more, if Swiss brokers are a must.

@Monsieur_Charles

Buying ETFs that are traded in CHF
Could buying a MSCI World ETF that is traded in CHF (f.e. UCTIS ) be a solution? Prima vista, these ETFs have slightly higher TERs, but are there any other disadvantages?

Quickly want to come back to this. Assumption again that I would stick to Swiss brokers and avoid USD-traded ETFs. Do you guys see any other disadvantages when buying CHF-traded ETFs? UBS and CS seem to have quite some CHF-traded ETFs that cover the usual MSCI areas

[rolandinho]

@Monsieur_Charles

CHF-traded ETFs? UBS and CS seem to have quite some CHF-traded ETFs that cover the usual MSCI areas

I don’t know which CS and UBS ETF’s you specifically mean, but I recommend to compare their TER, past performance & holdings to CHF-traded VWRL, and decide from there.

[Patirou]

Thanks, has been corrected.