Optimizing ETFs investments

Investing / Others
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Hi all,

A bit late to the game but my wife and I would like to put our dormant cash of about 50k (+ monthly savings going forward, approx 3-4k/month) to work by investing in a few ETFs.

We’re 34 yo and plan to stay in Switzerland long term.

We’ve basically been looking into the ETF investing topic for months now, and wanted to run our plan by the community to see if it’s sound from an investing, broker and tax perspective.

Portfolio: We have narrowed it down to a handful of ETFs. In the beginning we got excited and wanted to invest in themes and sectors alongside a “wider market” ETF but we concluded it will hinder compounding effects and transaction costs could be prohibiting, depending on the broker used.

Therefore we are considering up to two ETFs, one market ETF like VOO or VTI and one tech focused ETF like QQQ or IUIT.

However, we are conscious there is overlap in all of the above so we were considering if a Pharma/ HC focused like PPH or/and a Russell 2000 ETF would make more sense.

Frequency: ideally we would consider monthly but this depends on the account used and associated fees (see question below). Is quarterly still sensible in order to minimize transaction fees?

Broker: currently have a SQ account, but based on research it appears switching to IBKR would be better from a cost perspective.
Our only question mark is the following: my wife works in a big Swiss bank. Her position doesn’t require to disclose any accounts/tradings on my name but she cannot have any on her name. We’ve heard that IBKR can be quite painful in this respect, if the spouse of the account holder works in a big bank. Do you know anything about this and what issues could arise?

Tax (on dividends): we understand there are significant differences depending on ETF Domicile, ETF geographic focus and also the broker used.

What we have concluded is that for US focused ETFs, US domicile and IBKR would be the best combination. What if we stay with SQ? Is there a big difference between let’s say US domicile or Ireland domicile?

Finally (if you’re still reading, Thank you!!), we have not concluded if it makes more sense to target Acc or Dist ETFs. We don’t particularly target to live off dividends one day, we’re more interested in maximizing the compounding effect, since we’re starting off quite late. Therefore I would think Acc makes more sense but not all ETFs offer Acc option and people argue you can simply reinvest the distributed dividends. However, I think SQ charges transaction costs to reinvest dividends whereas IBKR doesn’t(right?). Is that a big consideration or would you say, if we’ve found the right ETF to not worry about acc or dist.?

Thank you so much for any feedback offered!!!

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Welcome!

ETF Selection: Unless you have clearer goals around risk and return I think your selection of ETFs should reflect your gut conviction, so I don’t feel I (or anyone) can really advise you here. The ETFs you mentioned seem fine to me.
When I started out, I believe I split 95% of my funds between VOO and VXUS and rebalanced on a quarterly basis.

Broker: from a fee perspective as clearly as it gets: IBKR (but you’ll find differing opinions here).

Taxes: I believe your domicile matters the most in these considerations.

Accumulating/Distributing: possibly slight advantages in fees with Acc (the ETF can buy shares at a much lower fee than you can, especially if you’re with SQ), but less flexibility in market timing (if you believe in that) as the ETF will buy new shares when dividends are paid regardless whether things are overbought or oversold.
With paid out divvies you can try to time your investments or you can re-balance between two or more ETFs.

Good luck!

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Hi and welcome!

Choice of funds: why funds investing only in US assets? As you mention, VOO/VTI and QQQ (I guess also IUIT) are 90%+ correlated.

Frequency: investing monthly could, on average (which almost never happens in reality but is handy for modelisation purposes), bring 0.57% more returns (flat, not yearly). You can calculate if the saving in fees from investing quarterly beat that. Both methods should work good enough and I wouldn’t fret it too much, the hard and success defining part is to stick to our schedule/strategy once we have decided on one.

Taxes: Investing through SQ means paying the Swiss stamp duty of 0.3% for foreign securities and 0.15% for Swiss securities whenever you buy or sell them. Other taxes should be the same between SQ and IBKR. IE vs US funds has been discussed pretty thoroughly on the board and is worth a dedicated search, the bottom line is that US domiciled funds are better for US securities (as they allow to get a tax credit from the Swiss taxation authorities for the unrecoverable part of the US witholding tax), there are other differences for the rest of the world which you might want to dig into and for which I am not at all a specialist.

Acc. vs Dist.: there’s not a huge difference for Swiss investors as we get taxed on the equivalent dividends either way. Accumulating funds allow to skip reinvesting fees, including forex ones (beware that the dividends are paid out in the currency of the fund no matter what currency you have bought your shares in) so they’re slightly more efficient during the accumulation phase. Distributing funds allow to get dividends out without paying fees for selling assets so they’re slightly more efficient during the distribution phase of your investing life.

As US funds can’t be accumulating by law and you seem to want to invest in mostly US assets, distributing is probably the way by which you will have to go to get the most efficiency out of your choice of assets/broker(s).

IBKR’s handling of account of partners of people working for a big bank: I can’t help you much on that one. I would try to open an account, be 100% transparent and frank when answering any and all questions they have and see what they have to say about it, provided the bank where your wife works is ok with that, which you have stated they are.

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This! ^^
Is.
The.
Most.
Important.
Thing.

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That’s not late at all imo, there’s still many years of compounding ahead :slight_smile:

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Others already chimed in with well thought out comments.

But I also would advise against solely investing in the US. I assume you base this on past returns, which is a common fallacy in investing. It is by no means an indication that the US will continue to outperform. You would be taking a bet on that here. And if you dont have an strong conviction and the expertise to back that up, I would not take that bet.

Don‘t bet on anything, buy everything. This would mean buying Vanguard total world stockmarket etf, ticker: VT.

You buy everything at the amounts the market currently thinks is a fair value, and reflects their future cashflow prospects essentially. The regional allocations change autmatically by time and who knows, maybe next year europe starts to outperform?

VT is als already 62% USA anyway.
An all cap total world passive index fund is the only truly passive investment vehicle there is imo. Everything else is taking active decisions.

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Here is some comparison between SQ and IBKR. Based on your question, it appeared to me that you are assuming for US ETFs , you need to move to IBKR. That is not the case. The main difference between these two platforms are costs/duties but not what you can trade. SQ is more expensive vs IBKR in mostly all departments. To be honest, IBKR is cheapest broker for Swiss residents

Based on my experience -: IBKR is one of the most recommended international broker for Swiss residents. Swissquote is one of the most recommended Swiss broker for Swiss residents. Everything depends on what you are looking for.

A SQ IBKR
Availability of US ETFs Yes Yes
Availability of Ireland / Swiss ETFs Yes Yes
Custody Fees (annual) 80-200 CHF 0
Stamp duties (CH Domicile etf) 0.075% 0%
Stamp duties (US, IE domicile etf) 0.15% 0%
Commissions (for US ETFs) 30 USD < 1 USD
Commissions (for key IE domicile) ~10 CHF 2 - 5 CHF
* Stamp duties are applicable at time of Buy and also at time of Sale

Depending on which ETF you buy, you might need to consider Foreign exchange fees too on both platforms. For SQ best would be to buy CHF denominated ETFs. Since IB has cheap forex, you can do what you like.

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Dont forget currency conversion, that is free on IB and costs like 1% on SQ. So any purchase of US etfs costs ~1.1% of the value + 30 USD

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Here are two main differences

US Domicile IE domicile
Applicability of US Estate taxes In scope Not in scope
Tax efficiency for US Dividends Better than IE

Tax efficiency
for an ETF life VOO, you can expect annual drag of 0.24% if you use IUSA (IE based) vs. VOO (US based). This is because you lose 15% withholding tax of the dividends which you cannot recover via tax credits. 0.24% is gross impact, but based on your Swiss marginal tax rate, this number can be around 0.15 - 0.20%.

US Estate taxes
More details at link below.
Summary is that US ETFs fall under US Estate tax jurisdictions. However, CH has good treaty, so for most this can be exempt with some paper work.
https://finpension.ch/en/das-beste-fondsdomizil-fur-schweizer-anleger/

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First of all, you are the best person to decide what makes sense to you. However, you also said you are new to investing. So some things to be aware of

  1. Past returns are not reflective of future returns. So please focus on expected returns for future. It is not so easy to figure this out, but this is what actually matters . If you would like to read what Vanguard is predicting, read Vanguard long term capital market assumptions

  2. There are few elements to consider while deciding Stock portfolio

  • Diversification of underlying securities (VTI is as diversified you can get when you look into US portfolio)
  • Regional allocation (your proposal is 100% US focussed. There is nothing wrong about it but please make this decision consiously. There are different views about this from various people). Some insights International diversification
  • Concentration -: any investment in QQQ or tech focus ETF should be considered an active investment strategy because QQQ is very much concentrated on few companies
  • Factor investing (this is a bit advanced but focus on factors like Small cap, Value , etc) Factor investing

Some comments regarding overlap

  • Russell 2000 companies are already included in VTI. So if you buy both VTI and Russell 2000, this would mean you are actually playing on Small cap factor by overweighting it. Just thought to highlight it
  • If you are not active investor, then taking a bet on QQQ or Pharma etc should be taken with caution.

Some ETFs for your consideration @WealthySprint

Ticker Index / Exposure Domicile Type
VOO S&P 500 US Distributing
VTI US Full market US Distributing
VXF Full US market excluding S&P 500 US Distributing
VXUS World market excluding USA - all caps US Distributing
VT World market - all caps US Distributing
VWRL World market Large and Mid caps Ireland Distributing
FWRA World market Large and Mid caps Ireland Accumulating
IMID/SPYI World market - all caps Ireland Accumulating
CHSPI Switzerland broad index Switzerland Distributing
VEUR Europe broad exposure Ireland Distributing
EXSA Stoxx 600 ETF Ireland Distributing
AVUV Small cap value ETF (USA) US Distributing
AVDV Small cap value ETF (World ex US) US Distributing
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@Abs_max what an MVP

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Just a few thoughts given you got stellar and detailed answers already:

  • QQQ is not a tech ETF, it’s called a tech ETF by people who have little critical ability and marketers, it’s just 100 non-financial companies on the NASDAQ, arbitrary.
  • re pharma, it’s the one industry I have some ability to evaluate, if you take the top 20 pharma by revenue, about 5 of them are private and another 5 have very serious problems. The remaining 10 would make a semi-decent investment. These should be relatively safe, they won’t perform miracles but they’re unlikely to lose you money either. I’m not sold on sector ETFs, but pharma may be a sector I’d put money on.
  • Russell 2000 is not a great idea in my opinion, if you want to go for factors then look at Avantis ETFs, they have several interesting offerings, but they’re a bit new
  • time: you’re not late because you can’t be earlier, time doesn’t turn back, there’s still plenty of time. Sure, compounding take at least 10 years to really kick in, and just under 20 to start performing miracles. Depending on your goals and strategy you may get to see it in action too
  • most important thing is to have a strategy and stick to it!
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@Abs_max Obvious than IBKR is way more cheap than SQ. But is it not a problem for you to have a huge part of your stach in IBKR, outside Switzerland ? I mean, for exemple there may be compliance risks, blocking like for Russians in Switzerland, insurance in the event of failure, customer service, etc.

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Having (payment) accounts and assets outside of Switzerland is diversification - a good thing, not a problem per se.

Yes - analyse your personal situation and do your due diligence on bank/broker.

That said, for many Swiss residents, the risks most likely to occur are likely domestic (e.g. debt collection or seizure of assets initiated against you, possibly erroneously or maliciously), not foreign/global.

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Actually I am strong advocate of diversifying in terms of brokerage. So why not have accounts in both. I don’t want to have all of my securities at one broker anyways .

Choice of brokerage is very personal. There is already lot of debate on this forum on this topic. Everyone thinks differently

Thread

My comparison was just to share the overview. It was not to suggest those choose one over other.

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Not sure if diversifying in brokerage helps much. if you want to diversify; I would propose to diversify in Jurisdiction. Aka instead uf US/IE use other fund locations. That may cost you quite some return, but gives you additional risk diversification.

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I do it all :slight_smile: obviously this is not optimal but I do not mind.

  • Domicile diversification (to hedge against random geo-political drama)
  • Broker diversification (to hedge against IT failure at orgs or my personal accounts due to my mistakes)
  • Regional diversification (to not assume US will do best forever)
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Wow, firstly we can’t thank everyone enough for the insightful comments! Special shout out to Abs_max for all this knowledge and willingness to share! This is truly invaluable.

All very good points made especially regarding selecting a strategy and sticking to it. Also, we acknowledge our investment focus in favor of the US. We do have reasons to believe that the US will continue to outperform the rest of the world in the next 5-10 years. We don’t know any secrets obviously, but just personal views on the global economy. Naturally we have our biases and blind spots but, given our current risk appetite is quite high, we believe it’s best to capitalise on momentum rather than overdiversifying and we can rebalance if we have a totally different view of the world say 5 years from now.

That said, you definitely made us think twice and thank you for that because it’s important to be fully conscious about our investment strategy and we‘re not done yet.

As we finalize our decisions we’ll definitely read all comments multiple times and may come up with new questions, which we won’t be shy to ask because this is truly a top community :raised_hands:t3:

Thank you all once again!

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Just one more thing on that topic: This view is held by many and the expectation of the US companies doing better is priced in already in today’s stock prices and why Shiller p/e ratio is at its highest it has ever been, except before 2022 bear market and before dotcom bubble. The US would have to outperform even more than today’s expectations to give you an outsized return on your investment.

Also economy/gdp growth is not really correlated to stock returns, as unintuitive as that may sound.

Sorry can‘t help it and just making sure you take everything into account :slight_smile:

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All the best.
And don’t worry too much about your decision to focus on US. Lot of Americans also invest mostly in USA. So you can just pretend to be American for investment purposes :slight_smile:

But then don’t be upset if Swiss companies or European companies rock the world in coming years :wink:

Investing is all about accepting the fact that not all your decisions would be optimal. But you would never know this until 20 years have passed.

Just do whatever makes you happy

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