There are two things that eat into an investor’s returns over the long run and a smart investor should strive to minimise:
Fees
Taxes
Most ETFs suggested on this forum are incredibly low TER (0.04%-0.15%) so there isn’t much room for improvement there.
However, taxes in Switzerland bode an interesting discussion on how to pick a tax efficient portfolio.
From my understanding in most cases there is no capital gains tax on an ETF and dividends are ultimately taxed as gross income.
For this reason it seems to me that a tax efficient investor would want to pick funds with lower dividend payouts, therefore, higher capital gains in the long run.
In general, it seems that US stocks pay out lower dividends than their developed world counterparts. Looking at VT vs VTI dividend payouts for 2018 I see that:
VT $1.66 dividends at EOY value of $65.46 = 2.54% dividend payout
VTI $2.60 dividends at EOY value of $127.63 = 2.04% dividend payout
If we assume that both funds appreciate at the same rate per annum (so 7% total with 4.5% appreciation and 2.5% dividends VT and 5% appreciation 2% dividends with VTI) and the only taxed proportion is these dividends then VT would have an extra 0.5% of its returns taxed. Assume 25% marginal tax rate then this would be 0.125% extra expense added to long run returns vs investing in VTI.
Of course, VTI also has 0.06% lower fees than VT so is more favourable there as well.
Note, there would also be wealth tax applied on the above but this would be fairly similar on both performances in this discussion.
Interested to hear any thoughts on the above.
P.S. Does anyone know how dividends are taxed in an accumulating fund such as CSPX?
I believe it’s simply because the valuations of US stocks are currently higher than the rest of the world. Should the stock prices fall but dividends remain fixed (in cash terms), the percentage yield would automatically become higher and roughly in line with the rest of the world.
I believe it doesn’t make sense to select ETFs based on dividend yield. If you do ETF investing the goal usually is to buy the whole market/segment etc. If you really want to optimize dividends than start investing in stocks directly with low or no dividend payment. In the S&P 500 alone there are a lot of great companies without dividends. https://www.dividend.com/investor-resources/sp-500-companies-that-dont-pay-dividends/
Yes they are taxed, worst case even for capital gains. Has been discussed here before several times. And when we are talking about tax optimization than CSPX (IE-based) is a bad idea you will lose 15% dividends due to tax leakage, better invest in a US based ETF when holding US stocks
Theoretically a company can redistribute profits either through share repurchases or by distributing dividends. A company would pick whatever is most tax efficient distribution to their shareholders.
You are right that you lose some diversification by doing this but I still think it is an important consideration and analysis to make when picking a portfolio/ETF. If there are similarly diversified options with lower dividend payout it seems to make sense to prefer that.
Investing in individual stocks likely has a much higher fee burden as well as time burden than just picking an ETF or two but it would be interesting to run some analysis there. These would be incredibly tax efficient for Swiss returns costing only broker fees + wealth tax.
When you say CSPX is worse case for capital gains do you mean that for tax purposes they assume all capital gains are dividends so tax you on the full appreciation? That would make it well worth avoiding! And IE based is another good point to remember. Thanks!
If the fund does not provide a report on the dividend amount then the tax authority will assume all capital gains are dividend amounts and will tax it fully. But most funds provide those reports. But you should be able to find threads in this forum with more info regarding this.
While we are at this, is buying Berhshire Hathaway at SIX (BRK/B:SW) instead of BRK.A:NYSE counted towards $60,000 limit for non-US residents?
(I am aware that for Swiss residents the limit of 60k is not there, but if you retire outside of Switzerland, suddenly you might need to start taking it into consideration)
tl, dr: Upon death you are treated as a US citizen. For US citizens the first 5M of your portfolio are exempt from the estate tax. The only concern swiss investors should have is if that treaty gets “revoked”
But my understanding from the discussion here is that its only 5Mio total (including swiss real estate etc.) and after 60k+ you have to go trough the US tax process.
Why don’t u worry about that when you’re actually about to move out. Stock market’s open every business day. Great chance to revisit all positions, reset CGT cost basis while it’s still tax free and optimize for new country’s taxman
BS
60k is guaranteed in any case, 11M (previously 5M) is for the case if all your wealth is in the US, else it’s prorated - if you have significant non US holdings (real estate etc) exemption can be much smaller than you think.
Because I have to deal with 2 tax systems already now, being a tax resident also in Poland. So thinking about it as “moving out” for retirement is just an excuse in this case
Actually you are right. My mistake, you can sell a lot cause the only important condition is < 50% of your yearly income in capital gains. So it’s OK.
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