Moving from VT to VWRL (or VWRD, or VEVE/VFEM)

Investing / Portfolios
1

Hi everyone,

I’ve been a visitor on the forum for a while now and have learned a lot from some of the more veteran Mustachians so firstly a big thank you for that!

As one of my first posts I wanted to get your opinion on something we are in the process of deciding regading our investments.

We initially started on Degiro with the VWRL, and a while back (after learning about it on this forum) switched to IB and continued adding only VT to our portfolio.

Now getting close to the dreaded (for some) limit of 60k for our US investments (includes our BRK.B shares we’ve been accumulating as well), we’ve made an informed decision to stop contributing to the US funds because of the US estate tax - this has been discussed already on the forum, and while it might be just a minor hassle, we decided we don’t want to leave our kids with a potential freezing of our portfolio and complicated administrative proceedings with the IRS when the time comes.

I was happy to have the VT diversification into small-caps but not caring to replicate it with several EU UCITS ETFs (lazy investor here) I’ll be more than happy with a large- and mid-cap World ETF like VWRL.

So our dilemma is the following :

  1. we continue to invest in VWRL (AEX EUR, commision free) with Degiro.

  2. we start investing in VWRL in EUR at IB for liquidity sake (and maybe transfer and merge my existing shares from Degiro to IB).

  3. we invest in VWRD in USD at IB for liquidity and to have USD dividends that can be reinvested immediately - I tend toward THIS at the moment.

  4. we start investing in VEVE and VFEM (90/10%) on IB instead of VWRL to lower the TER from 0,22 to 0,13.

  5. less desirable to invest in VWRL in CHF at IB to avoid FX fees (but would have to do a currency conversion for the USD dividends quarterly and incur higher exchange fees).

What is your take on this?

Thanks for reading so far and your input!
Marc

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3

Yes of course, according to the bilateral estate tax treaty, we know that, but there’s potentially a lot of hassle involved (again, this might be subjective on our part) for my wife or kids having to file a US tax return, declare / have all our Swiss and other international assets evaluated etc and have the US porfolio blocked in the meantime, in order for the tax to be calculated.

5

Not wanting to dwell much into this, as this is already decided, as far as I know however even a 75k US stock or fund position (be it part of a 500k or 5,5M portfolio) will trigger the IRS proceedings in order to evaluate for the “potential” tax, even if in the end no tax will have to be paid.

7

This would be my choice.

I’d be careful with such statements. It’s possible this wouldn’t be an issue if you’re below the estate tax limit. However, I’d rather be safe and fill out the IRS form.

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9

Yes, that would be my second choice for now - it satisfies the human irrational itch to improve the “too simple to be effective” - VWRD/VWRL approach (while improving on the TER), and I don’t worry too much about spreads and/or volume, even after getting an ideal limit order filled the ETF can rally another 1% after that before market closing.

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  1. Without the filled out form, they don’t know the total value of the estate, so they don’t know whether any taxes are owed. If you have a couple of millions in US ETFs, they might guess that the total estate could be above the limit, whether that’s the case or not.
  2. They might not sue here but could it be possible that the heirs would be denied entry to the US?
14

In my opinion, it’s not a good tradeoff to avoid US securities because of the estate tax issue.

  • The most important: most of us are young, the risk of us actually passing away is very, very low.
  • In the case we actually would pass away, as already stated, not tax would be due. It’s likely the question of filling some paperwork and waiting for a year or so. I’d expect the “hassle” of it being comparable to filling a DA-1 and waiting for a decision.
  • So it’s essentially “buying insurance” for an event with very low probability and low severity.

The way I am personally dealing with this is that I’m mentioning this in the instructions I’ve prepared for my relative for the case when I would pass away. They contain an article on the issue and instructions to hire a lawyer experienced in the topic of CH and US tax law and pay the lawyer from my estate.

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15

First, liquidity in the sense of trading volume is not relevant for you. There will be enough shares available for you. So instead of trading volume of ETF, look at spreads in different exchanges and currencies. Half of the spread is an extra cost of a trade.

Second, I would suggest to keep one broker. Especially since your portfolio value is not that big. I would choose IB for low fees and margin loans and either stepwise sell and rebuy or order a securities transfer. As always, compare costs.
What about your 3a by the way?

Concerning buying in different currencies at different exchanges with different brokers: calculate all costs (broker’s fee + exchange fee + currency exchange fee + half of the spread) and compare. My guess it would be cheaper to buy in the currency USD/EUR/CHF you have at the moment, without a conversion. Should depend on the amount you want to invest though.

From all options you listed, only splitting VEVE + VFEM is significantly different. With your portfolio size it makes sense, but then you should rather sell all VWRL.

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16

No matter in which currency you buy VWRL (IE00B3RBWM25), it distributes USD.

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17

Could you post or pm the information you regrouped ?
I would like to do the same.
My wife is an US person so it best for her to fill the IRS form.

18

We think alike. Glad to read your reply.

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19

Yes, totally agree about the trading volume, there’s always 50 shares of VWRL in the ASK. I tend to not worry about the spread either, tell me if I’m wrong : even if I use a Market order and buy let’s say a bit more expensive, the price could go up or down by several percent by the end of the trading day (if I buy in the morning for example), so in the long run it doesn’t matter, right?

Yes, IB is my broker now, we just stopped buying and have not yet moved/sold the VWRL shares that we have with Degiro, but plan to do that to simplify the situation (especially with the CH tax return to avoid having dividends from two brokers when I start buying on IB).

My 3a is at VIAC with Global 100.

Well that’s why I like the VWRD idea (the USD dividends can be used immediately to buy more VWRD which is in USD), and why I would probably choose to buy the VEVE/VFEM combo on the SIX if I went that direction, at least no FX cost on buying the shares (but again the exchange costs need to be taken into account). I invest some 3-5k monthly.

As said before the VWRL will be either merged with the future IB shares or sold (enough time has passed to not be an issue with the Swiss tax office).

Thank you for your ideas!

20

Yes.

According to some information that I have “from Internet” moving securities bought at Degiro at a European exchange should cost you not more than 50-60 CHF. If you want to avoid a hassle, might be worth just paying for it.

There are no issues of this type whatsoever.

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21

My instructions include:

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24

For a joint account(account in the name of two people not married) with IB, how does it work in the event of the death of one of the two?

26

What do you mean by this?

27

Ok it’s true, I was only thinking about 60k USD in VT that you were saying you are approaching and I don’t know how much you have in VWRL already.

What I meant is there is a rough rule of thumb how many funds you can/should have in your (globally diversified core) Portfolio, namely around 1 fund per 50k value. So splitting a 30k portfolio to have 3k position in Emerging Markets ETF is not very helpful - more transaction costs but not much saving on expenses. If you have over 50k, 2 funds like you have described is good.

28

Makes sense to not have too many funds you invest in regularly with a small account because of fees.

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29

A big thanks for all your comments and suggestions (especially @Dr.PI), which cleared up some aspects and helped me evaluate my options.

The decision came down to choosing between VWRD (Vanguard’s FTSE All-World ETF) with a TER of 0,22%, and a combo of VEVE (Vanguard’s FTSE Developed World ETF) and VFEM (Vanguard’s FTSE Emerging Markets ETF) in a 90%/10% allocation with a combined/average TER of 0,13%.

Assuming for the sake of this post that the two options are equivalent (not quite in their composition, a quick look at the factsheets will tell us that the VWRD contains 3784 number of stocks, and VEVE+VFEM 2254 + 1893 = 4147 number of stocks) and offer a similar return, the difference of TER (0.09%, calculations below made with an online compound interest calculator) would result in:

  • One time investment of 100k with an annual return of 8% after 20 years : 492.7k
  • One time investment of 100k with an annual return of 8.09% after 20 years : 501.5k
  • Over-performance of VEVE + VFEM → 1.8% of the portfolio over 20 years.

Or a second variation:

  • One time investment of 10k + monthly contributions of 1k with an annual return of 8% after 20 years : 638.3k
  • One time investment of 10k + monthly contributions of 1k with an annual return of 8.09% after 20 years : 645.8k
  • Over-performance of VEVE + VFEM → just under 1.2% of the portfolio over 20 years.

The extra (non-recurring) acquisition/exchange fees for buying two funds per month compared to just one are negligible over the long term (see a comparative overview of the commissions with IB below).

– However, despite this obvious advantage, I decided to invest in VWRD as my core ETF going forward, and not only for the sake of simplicity and “laziness”. Let me explain.

As (mostly) passive investors and Bogleheads, we know VT (US based) or VWRL/VWRD (IE based) to be an ideal solution for a well diversified, simple investment covering the world stock market. So it makes sense to take VWRD (in my case) as the benchmark for the returns I was looking for long-term.

And the more I looked at it, the more I realised that assigning the combo of VEVE + VFEM a clear advantage just because of the overall reduced TER (0,13% vs 0,22%) would be wrong.

  1. The lower TER is not the only variable influencing returns in this comparative scenario.
    Even assuming the two options were perfectly equivalent, setting up and maintaining an exact and correct (90/10% or 89/11%) weighting between the Developed and Emerging Markets ETFs through monthly contributions and even monthly re-balancing is technically impossible.

  2. As a result slight deviations of the allocation would occur constantly and influence the short- and consequently the long-term performance of the portfolio, and likely so in a matter that could very well negatively compensate for the 0.09% advantage that the TER had given in the first place.

  3. Even if these slight deviations would cause the opposite effect, and in fact improve the returns of the two ETF portfolio over VWRD, this should be attributed purely to luck. Or put another way, to the inadvertent active investing component that was introduced into the equation.

  4. And if one realised this, why not skew the allocation even further, and improve on this “luck”? Resulting in an active approach investing with its increased risks.

Which leads me to this - in my opinion, for a truly passive broad based index investor, the two ETF portfolio should be avoided - what do you guys think?

A whole different matter is when these two ETFs are used in a different way in one’s portfolio, and this is where I think their usefulness, and advantage (much more than the low TER) comes from. Two examples:

  • a somewhat lazy investor seeking to invest just in these two funds, but that wishes to have the option of adjusting the weighting between Developed and Emerging Markets according to the economic situation, and moreover thinks he can read the macroeconomic signals in order to boost his returns (no one can consistently).
  • an investor setting up a complex portfolio with many funds and wishes to constantly fine-tune his allocation between a wire array of investments, like for example, the S&P 500, Developed Markets, US Small Cap, Emerging Markets, and let’s say UK Medtech Stocks.

Comparative Overview of IB Commissions and Exchange/Transfer Fees, for an investment of 2k CHF

Portfolio 1 VWRD or VWRL:
VWRD can be bought in USD on the LSE (London Stock Exchange) or as an equivalent
VWRL in CHF on SIX (Zurich) or in EUR on AEM (Euronext Amsterdam) for the following fees (I’m converting everything to CHF at the current exchange rate, even though the actual internal IB system might be different):

LSE (for USD denominated securities)
IB commission : 0.05% of trade value, min 1.7 USD
Exchange fee : 0.0045% (0.45 bps) of trade value, min 0.10 GBP
Clearing fee : 0.06 GBP

Currently 2000 CHF = 2056 USD, and -2 USD currency commission = 2054 USD
Fees: 1.7 USD + 0.10 GBP + 0.06 GBP = 1.65 + 0.12 + 0.07 CHF = 1.84 CHF

Zürich (SIX)
IB commission : 0.05% of trade value, min 1.5 CHF
Exchange fee : 0.015% of trade value (min 0.5 CHF) + 1.5 CHF
Clearing fee : 0.38 CHF
Trade Reporting Fee : 1 CHF
*No currency exchange fees.
Fees: 1.5 CHF + 0.5 CHF + 1.5 CHF (all minimum values) + 0.38 CHF + 1 CHF = 4.88 CHF

Euronext (AEB)
IB commission : 0.05% of trade value, min 1.25 EUR
Exchange fee : 0.006% of trade value, min 0.75 EUR
Clearing fee : 0.10 EUR

Currently 2000 CHF = 1936 EUR, and -2 USD currency commission = 1934 EUR
Fees: 1.25 EUR + 0.75 EUR + 0.10 EUR = 2.17 CHF

Conclusion: VWRD. Even when currency exchange commissions are included, the lowest total fees are on LSE ; not by much, but because we are investing in the USD denominated ETF, we have the additional advantage that the earned dividends (that are always in USD) can be invested as soon as they are received without any additional currency exchange expense.

Portfolio 2 VEVE + VFEM:
VEVE and VFEM can equally be bought on SIX in CHF or AEB in EUR, as well as on the LSE but in GBP (where the fees change slightly compared to buying an ETF in USD).

Same results here with lowest fees on the LSE exchange, but with twice the fees every month if one wants to add to both the VEVE and VFEM positions monthly (currency exchange fees for the USD dividends will apply no matter what). Considering monthly contributions the annual costs to buy two funds instead of one is less than 100 USD/CHF a year, so max. 2k over 20 years, not significant.

Any comments and/or corrections are welcome, especially if any of this makes no sense :slight_smile: , and maybe this can also help others in my situation.

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30

When VFEM performs better than VEVE (or the other way round), the ratio between the two in your portfolio will indeed change a bit. However, the ratio of developed markets vs. emerging markets within e.g. VT will also approximately change the same way. I.e. such performance differences wouldn’t move you away from a global market cap weighted portfolio. And that’s definitely not active investing. Longterm, it’ll certainly need adjustments but you really don’t need to worry about such a combination diverging within a short timeframe.

I don’t normally invest in both, VEVE and VFEM, each month. I check which ETF is further below the target allocation and then buy shares of that ETF. Once a year or so I’ll recheck the target allocations using VT or FTSE factsheets. This keeps the transaction costs (incl. time) down and is close enough, in my opinion.

That said, it’s perfectly fine to simply invest in VWRD, of course. The overall fees are still very low. And compared to lots of other investment decisions, this won’t have a big impact. It’s much more important to stay the course. I.e. choose a solution that you’re comfortable with.

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