Mustachian portfolios

Investing / Portfolios
136

Dear Mustachians,

First of all I would like to apologize for my lack of knowledge on the Topic and would appreciate any feedback.

1- I have bought some VUSA (CHF) (not much just to get started and not be paralyzed by inaction)
2- However having read some posts on the topic, I now think that VT is more diversified and probably closer to what I am looking for long term.
Therefore I have a first question: Is there any point in keeping both ETFs - VT having the majority - or absolutely none? I understand it would only increase US exposure.I don’t necessarily have a problem with it. Would then 80%VT and for instance 20% VUSA be ok to have a slight increase in US exposure or should I simply sell the VUSA now and focus on VT?
3- I can see that VUSA is domiciled in Ireland and VT is domiciled in the US. Does it make any difference from tax perspective?

thanks for the answer

137

hey @maillekeule,

do it :wink:

the difference between 100%VT and 80/20 VT/VUSA, in case you are fine with both asset allocations, is you have double the transactin costs, more effort declaring taxes and managing your portfolio, etc…
overall, potentially very minor differences. unless you trade at expensive swiss brokers…
i dont see any other hard reason. however i also cant’t see any plausile reasoning on why to increase SP500 exposure over that of VT alone.

138

it makes a lot of difference from the tax perspective. that is the reason why the Irish ETFs exist in the first place. For Swiss domiciled investors, it is fine to stick with the American versions of ETFs, because we are not hit by 30% withholding tax on dividends, but just 15%, and even that we can get back from the Swiss tax office.

I also own VUSA in CHF and later on I bought VT. VUSA is an unfortunate fund to keep, because it is hit by these taxes I mentioned above. That’s why I will replace VUSA with VFEM. VEUR would also be an option.

You might be tempted to close the Swiss broker, but I think, since I went through the trouble of opening an account there, I will keep it. In the end, it’s not bad to keep your portfolio split between 2-3 brokers, especially if you invest 90-100%.

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139

I’m a beginner here, so don’t take my words for advice, but my portfolio currently consists of

70% Vanguard FTSE All-World UCITS ETF
20% SPDR MSCI World Small Cap UCITS ETF
10% UBS ETF (CH) Gold (USD) A-dis

All traded in CHF on SIX via Corner Trader.
My bet on gold is that it will react inversely to stocks in crisis times and I will use it to rebalance. We’ll see how that goes.

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140

I like in your portfolio that it is simple and that you obviously put a lot of thought in your strategies.

I shudder a bit remembering the TER of SPDR MSCI World Small Cap (0.45%). And I really wonder why UBS named their gold etf “dis”. :thinking:

141

I want to start a portfolio using VTI and VXUS. I choose these two funds over VT because of reasons listed here: Tax optimisation for ETF investing

I am still not sure about what allocation I should choose, should I just mirror VT every year? e.g. currently ~56% US 44% exUS?
Doesnt holding VT make more sense, because the allocation is adjusted automatically on the fly?

So lets say I go with the 56%US/44%exUS split now. and in 5 years time lets say VT is 49%US and 51%exUS, and I never adjust it, wouldn’t have holding VT all this time, made more sense and a greater return?

What would your guys strategy be for a VTI/VXUS(or VEA) Portfolio?

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142

I hold VTI, VEU, VWO and VSS atm. I have fixed ratios between the funds. I underweigh VTI with 35% atm as I feel uncomfortable with the historically very high multiples. This probably is not perfectly mustachian.

143

If you choose the correct ratio from the start, you will not have to rebalance. By buying 56% VTI and 44% VXUS, you basically replicate the VT, so it will, within a margin of error, stay the same.

And a market weighted ratio is not a guarantee of best long-term return. It just has a nice feature of auto-rebalancing itself so the maintenance costs are low. If you went 100% USA 5 years ago, you would have made a much better return than with VT. It’s hard to say what will do better. If your allocation is not exactly market weighted, you slightly overweigh some market, so you place a bet on that market, that it will do better than the rest.

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144

But what is the correct ratio?

I think when VT launched, the US part was 49% (I could be wrong, but lets assume it’s true)
So I would have invested 49% VTI and 51% VXUS, now in hindsight, this would have done worse than going with VT.

My assumtion is for the exUS percentage in VT to increase, this exUS part has to do better that the US part. Is this somewhat true, or completely wrong?

145

The correct ratio is the current ratio.

Look, it’s like this. Imagine you start with US being worth 100 and exUS as well 100. So the ratio is 50:50. Now US goes up to 150, while exUS stays at 100. The ratio is now 60:40. But this ratio has changed for both the VT and the individual ETFs. You don’t need to rebalance anything, because your US ETF is now worth 150. I mean… how else can I explain this that you understand?

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146

I see what you mean now, thanks for that!
I was too focused on how to divide my monthly investment amount, but didn’t consider the actual stache growing accordingly

147

Indeed, I’m also not so happy with that, but the only alternative for one stop shop MSCI World Small Caps is the iShares MSCI World Small Cap UCITS ETF which has a TER of of 0.35%, and is not traded on SIX in CHF and also has securities lending.

Were I investing on IB, I’d probably go with a mix of VSS + VTWO for small caps, but well … I’m not.

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148

Lets say that you are investing every month with a certain desired portfolio value.

Month 1:
Desired portfolio value: 8,000 CHF
Then, as per current weight in VT, I would buy 56% of VTI , i.e. 4,480 CHF and the rest (44%) allocated to VXUS.

Month 2:
Desired portfolio value is 16,000 CHF
In month 2, the weight of US in VT is 54% and ex-US is 46%
Which means that out of your target portfolio value of 16,000 CHF, VTI should be 8,640 CHF and the rest (46%) should be VXUS (as per the weightings in VT in month 2).

Then, in month 2, I would take the current portfolio market value on the day of investment, look at the target desired portfolio value keeping 16,000 CHF in mind and then accordingly purchase the VTI and VXUS units (taking into account transaction fees) such that the total holding of VTI becomes 8,640 CHF and the rest goes to VXUS, i.e. 7,360 CHF.

Is this the right way to go about doing your monthly purchases, or am I overly complicating things?

Would appreciate any feedback or criticism. Thanks!

149

You should always buy according to the current ratio. It just so happens, that once you calculate the number of shares you should buy, it should stay roughly the same.

Let’s say that one share of VTI costs 200 and one share of VXUS costs 100. Their market share is 50/50 and you want to spend 2000. So you buy 5 shares of VTI and 10 shares of VXUS. In future, if you buy the same number of shares, you should more or less keep the correct ratio. I say more or less, because of dividends, for example.

You only need to rebalance if you wish to keep a fixed ratio, e.g. 50/50.

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150

Thanks a lot guys for spending the time to write the answer and the great explanations.

Based on your comment above I am finally of the opinion to focus on VWRL in CHF unhedged as a « hassle free » solution. I really would like to make it as easy as possible for me to manage. Sorry again for these basic questions but a few area remain a little unclear to me despite having read this forum a lot.

1- what should be the decision criteria between VWRL and VR? I understand VT includes also some small caps and therefore Glinda portfolio is well thought through since the first 2 ETFs would tend to reciprocicate VT. What are your views on that? Is VWRL+small caps better than VT alone from a tax perspective (or the difficulty of doing tax declaration) ? I kind of like this portfolio and selling my VUSA to invest for world small caps and mirror VR that way seem also tempting.

2- not sure I full grasped your answer regarding VUSA (CHF). Is there a tax difference with VWRL despite the fact that they are both hosted in IE ? From which perspective is it harder to handle or not as nice VWRL ? Apologies if I misunderstood you.

3- i liked your explanations about rebalancing. However… it may still be a little unclear to me. Let’s take Glinda’s example again. Let’s say you have 100kCHF invested as follows on day 1 of investment (70k/20k/10k). I see that rebalancing is ensuring on day 2 of investment that you keep the same % split for the 3 values either by selling the performing ones or adding some money to the lower performing ones. Am I right ?

151

Sure, do it. It’s definitely not a bad choice if you don’t want to learn about investing in US ETFs.

Well I would say the criteria would be based on your domicile. If you are planning to be domiciled in Switzerland for years to come, then it’s fine to use the US ETFs. The Irish ETFs are meant for people domiciled in a country without a favourable deal with the US, or maybe for people who use a broker without cheap exchange of currency to USD.

Well, US funds are better than the Irish funds from a tax perspective (for Swiss residents). So VT is better than any combination of the Irish funds.

Also, the small caps don’t really make a big difference. The have a really small total market cap plus their return curve mimics the large and medium caps. Here’s a demonstration:

image
image1164×464 40 KB

If you go for VWRL instead of VT, you will probably lose (per year) around 0.3% on tax, 0.2% on other hidden things, so maybe 0.5% in total.

What I mean is, if your money is stuck with a Swiss broker (CT, Swissquote, PF), you don’t necessarily have to close your account. You could buy VFEM (Emerging markets) or VEUR (Developed Europe) instead. If you own VUSA, then Vanguard has to pay 15% withholding tax to the USA for the dividend, which is 2% of the portfolio. This means that 0.3% of the portfolio is lost. If you, however, own VOO, you can get a refund from the Swiss tax office. If your portfolio is worth 100’000, that’s like 300 CHF extra money each year. sure, in the first year it takes a lot of time to understand it and learn it, but in the following year it should cost you maybe 10 minutes of your time.

And if you invest in VFEM or VEUR, there is no easy tax to reclaim, so theoretically no potential loss.

Yes, if you want to keep a fixed ratio of A and B (let’s say 50% / 50%), then if A is outperforming B, then you will need to sell some A and buy some B to bring it back to 50%. However, this does not apply to replicating VT, because there the ratio between US and exUS is NOT fixed! So once you replicate the fund, it should roughly keep the right proportions.

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152

If you look at longer term returns, the Small caps do better than all world.

Look at MSCI Small Caps here
https://www.msci.com/documents/10199/a67b0d43-0289-4bce-8499-0c102eaa8399

and MSCI World here
https://www.msci.com/documents/10199/178e6643-6ae6-47b9-82be-e1fc565ededb

These graphs trace back to 2003. This is also the reason my portfolio is overweight on Small Caps.

Basically, Small caps offered the same returns as MSCI Emerging Markets but without the crazy volatility. VWRL follows the FTSE Index, so includes 10% of EM.

VFEM (in CHF on SIX) may be a good option to add more weight to EM.

Another option would be the new XMME Xtrackers MSCI Emerging Markets UCITS ETF 1C which also trades on SIX in CHF, has a TER of 0.20% and apparently slightly better returns than VFEM. In this scenario, I would take the CBMWOR ComStage MSCI World TRN UCITS ETF as base, as it also trades on SIX in CHF and has a TER of 0.20%. Then adjust the proportion of MSCI World to MSCI EM as required.

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153

Indeed they do. You don’t even need to supply the second link, because it’s already visible on the first chart. The ACWI IMI is the all country world investable markets index. That covers like 99% of all publicly traded stock. So it also includes small caps. What I meant to say is that Small Caps has a market cap of 6 billion USD, whereas ACWI IMI has 53 billion. So small caps have a share of only 10% of ACWI IMI or VT, plus they give a return that looks like an amplified version of the large and medium caps. This means that in the end the difference between VT and VWRL is very small.

But of course, if you decide to overweigh small caps, like you did (20% instead of 10%), then it’s a different story.

That’s true, it looks impressive. But if you look at what happened to small caps in 2008, you will see they dropped down to the level of ACWI. I’m curious to see what will happen to them during the next big crisis. I dare say they will get hit by it in a greater way than large caps. You get nice growth during bull market, but also big drops during bear.

154

You don’t need to get crazy at digits and rebalance every month, you can simply adjust ratios every 3/6 months buying more (or less) shares of one of the two ETFs

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155

Thanks @Bojack I think your last paragraph provided a key pointer.

If one wants to maintain a pre-defined fixed portfolio weight, say for e.g. VTI 50%, VXUS 40% and BND 10%, then it is required to do rebalancing every month when the fixed sum investment is made (taking into account existing market value). Maybe the term “fixed sum investment” wouldn’t be appropriate as one is essentially then doing dollar value averaging to keep the pre-defined weight same (?).

If one wants to simply replicate VT, then the important thing is to get the starting ratio correct in the initial gross investment (for e.g. VTI 56% and VXUS 44%) and then the portfolio will rebalance on its own (?).

I guess this is what it boils down to. I am still a bit confused on how the monthly investments will work out. For e.g. after the initial ratio is set and one wants to invest a fixed amount (say 8,000 CHF) every month, does one just buy 4,000 CHF worth of VTI and 4,000 CHF worth of VXUS?

Please excuse me if this query sounds overly simplistic. I am really interested in learning these core basics from the wealth of experience and knowledge here. Thanks!