Switching from CT to IB

As a recent survey on this forum has shown, there are two dominant ways to invest:

  1. Irish ETFs at Corner Trader in CHF
  2. American ETFs at Interactive Brokers in USD

I have opted for the first option almost a year ago. Now I would like to use this thread to sum up and evaluate if it’s worth to switch.

Sending money

At CT it’s easy. How is it at IB? Are there no problems in sending large amounts to USA? Are transaction costs easy to predict? What about sending money back from USA?

Currency exchange

At CT you spend CHF, so no problem. How is it at IB? I tried the demo Web Trader from IB. I started with 500’000 USD. First I bought some shares listed in EUR directly. It created a negative EUR position. Then I bought some EUR on Forex. Is there any particular order in which this should be made? Can I block the ability to make negative positions?

Transaction costs

At CT that’s 0.12% commission + 0.15% stamp duty. At IB that’s $0.005 per share. So for example it could mean 270 USD at CT vs 10 USD at IB per year.

Withholding tax

As @hedgehog pointed out, Irish ETFs have a hidden cost of 15% WTAX on US dividends. If a dividend is 2% then we are looking at 0.3% annually. 300 USD from a 100’000 USD portfolio. A similar amount should be deducted from the American ETF, but levied on you, not on the ETF. By default it is 30%, but if you sign the W8BEN form, then it will also be 15%, correct? Do you fill this form this once, by opening of the account, or every year?

Reclaiming the tax

With Irish ETFs there is nothing to reclaim. With American ETFs you can fill a DA-1 form every year, and then the amount of WTAX will be deducted from your Swiss taxes, correct? What I don’t understand is why do you need to earn “a lot” to be able to discount all WTAX? Even if your portfolio is 1’000’000 USD then your WTAX will be something like 3’000 USD. You don’t need to earn much to pay 3’000 taxes in Switzerland?

Stock ownership

In Europe you are the owner. If the broker goes bankrupt, they can’t touch your shares (right?). In USA, the stock is owned by the broker in your name. If IB goes bankrupt, you “should” be protected up to 500’000 by the SIPC, as one forum member recently checked. This is some complex legal stuff and I guess nobody can 100% confirm or deny it.

Estate tax

With European ETFs it’s no problem. But with US ETFs, over 60’000 USD there is about 40% tax upon your death. If you are a Swiss resident, then you are safe up to 5’000’000 USD. If you leave Switzerland, then you will probably better sell the US ETFs and buy European ones (right?).

Tax declaration

This is something I have not yet made. I am on B permit and only starting this year will I be obliged to do it. Any differences as to what CT and IB provides in order to make your tax declaration?

Right moment

If I do decide to switch, what would be the right way to do it? If I sell all at CT and buy at IB, I will generate a lot of turnover. I would not like to be classified as a trader and have to pay capital gains tax. Theoretically it says annual turnover should not be higher than 5x portfolio, but I don’t know how exact are the tax authorities. Also, will I need to declare the period at CT on my tax declaration, or only the status at the end of the year?

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With IB you’ll be sending franks to a Citibank in UK. The transfer however can be done for free, no need to waste money in fees on expensive and slow SWIFT transfers: Citibank’s connected to SIC and so you can get a CH IBAN that will look like a domestic transfer to most swiss banks. EUR transfers are done via SEPA, free at most banks too. Only USDs would you need to send to the US direcly.

It’s the cheapest there is for retail investors. You get fair interbank market rates - bid/ask spread maybe around 0.5-1pip, which is negligible considering the daily volatily, at the cost of about max($2-3, 0.002%) in commission.

Doesn’t really matter so long as you cover negative balance quickly

Sign up for a cash account instead of margin account. But I wouldn’t advise it, margin account is much more flexible even if you’re opposed to the idea of borrowing money from the broker. E.g. with cash account you’ll need to wait 2-3 business days for transaction settlement after selling a stock before you’ll be able to buy anything again with the proceeds.

That’s with fixed pricing scheme. But I think tiered is almost always cheaper even at small volumes: USD 0.0035 per share to IB itself + commission from the exchange, the latter can be negative! E.g. BYX rewards you for removing liquidity (buying at market from order book), NYSE ARCA rewards for addiing liquidity (e.g. limit buy order under market). In any case, the commissions are much smaller than what you’ll get at any swiss broker, in a good part due to the absense of ridiculous swiss stamp duty.

The swiss tax authorities can’t afford to give out money for free which they essentially would be if your swiss tax rate ends up being under 15%. You shouldn’t be able to get a full reimbursement in this case AFAIK. 15% will stay in US either way.

You can just instruct them to transfer the shares to IB. That would mean no transactions and nothing to report to noone. Normally, brokers charge some fees for transfering, but I think some people on this forum did and AFAIK were saying it was free at CT?

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Haha, I think I’m fine with 10 dollars per year. At some point you have to stop optimizing :slight_smile:
Come to think of it, how is IB able to keep such low prices? They need to have a huge turnover. They definitely lose money with people like us.

In Zurich if your taxable income is 100’000, you will pay 17’000 in taxes. Is that enough for a full refund? I guess it could become a problem once you reach FI and don’t generate any more income. How does this refund work actually? Does the Swiss state receive this withholding tax back from USA if you fill the form? What is the math behind how much you can refund?

I guess transferring my shares from CT to IB would save me the stamp duty, but eventually I would need to sell them in order to take advantage of the cheaper American ETFs. Would it not be a problem if I made this “exchange”?

By the way, you wrote in a different thread that you own VTI and VEA, because of TER and fund size. Does it make a big difference if the fund has 80 bln or 8 bln AUM?

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Yes, that’s their business model

It should be

Send DA-1 form after the end of the year to the tax department that processes them: Kantonales Steueramt Zürich, Steueranrechnung, Bändliweg 21, Postfach, 8090 Zürich - note that it’s separate from the address to which you’re supposed to send the main tax declaraion (the latter goes to scan center and schredding), and it can be filed independently from it any time within 3 years after the end of the tax year. Within a few weeks normally they should either wire you the cash or tell you what they otherwise decided to do with you - maybe they’ll just want to exclude dividends from your swiss taxable income to avoid overpaying you

The primary legal basis here is Art. 23 “Relief from Double Taxation” of Swiss-US income tax treaty and it gives them some playroom in decisions:

“The relief may consist of
i) a deduction from the Swiss tax on the income of that resident of an amount equal to the tax levied in the United States… or
ii) a lump sum reduction of the Swiss tax; or
iii) a partial exemption of such dividends from Swiss tax…”

I don’t think so, at least from a quick glance at the treaty I didn’t find any such propositions. Withholding tax is compensated from swiss income taxes that you would be paying on this dividend income here

If you hold onto them for 6 months before swapping into cheaper ETFs, I don’t think there will be any problem whatsoever

It has a difference to my peace of mind. It’s not very pretty how ETF units creation and redemption is done compared to mutual funds (but US mututal funds normally won’t take nonresidents), I really prefer to go for the biggest guys here

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Are you currently using the tiered pricing for all your orders ? If yes, could you give somes exemple of the fees applies on your last transactions.

i recently bought shares of vanguard ETFs, and for $ 700 worth of shares i paid $ 0.36 in commissions.

What does “not very pretty mean”? Do you worry about liquidity? About not being able to find a buyer or a seller at a given moment? If that’s the case, then I don’t care because I buy to hold. Or are there other risks involved?

If you wanted a mutual fund then I guess you could go to Vanguard UK (or do they also only take British residents?). But they have an annual account fee of 375 GBP :flushed:

About estate tax: If I moved my Irish ETFs to IB, they would not be subject to estate tax, right? The broker doesn’t matter, only the domicile of the asset? Do you know anybody who was dealing with estate tax and is it really no problem?

About SIPC and stock ownership: What happens if IB goes bust? Are you definitely covered by SIPC? And even if you are, what if you have saved up more than 500’000? Why are securities by American brokers not owned by the customers? Is this not an issue for you?

Edit: Here is a nice article about unit creation of ETFs. So basically if the ETF wants to create 50’000 new units of the fund, it can order them by the market maker. The market maker then buys all the stocks and gives them to the ETF, receiving the 50’000 units of the fund. Then he can sell them at a profit. I don’t see any big risks here.

The main question is on which conditions the market market will created shares. I don’t think that trading 100 to 1000 shares on an illiquid etf will triggered the share creation

Estate tax is not an issue

Spic or not spic. Nobody is able to clearly answer to this question. Even the info from IB is not alligned

According to the article I linked, the market maker trades with the ETF at NAV price. ETF creates new units in large batches, like 50’000 units (I guess in order to be able to replicate the index properly). The market maker can then sell these units at a premium, this is how they make money. So the buyers and sellers are paying with the spread for the creation and destruction of the units. In an index fund, this cost is covered by the fund, so it is included in the TER.

Care to elaborate? I cannot ignore this issue just because a guy on the Internet said so. :wink:

My personal experience was with SWDA, it spots $11B AUM, but traded rather thinly for that figure, e.g. today only ~35 trades, and there’s a good amount of spread last time I tried to sell it
http://www.londonstockexchange.com/exchange/prices-and-markets/ETFs/trade-data.html?page=0&pageOffBook=0&fourWayKey=IE00B4L5Y983ZZGBXEUE2&formName=frmRow&upToRow=-1

Now I’m only going for the biggest and most liquid funds. VTI is traded much much more heavily.

I don’t think it’s specific to american brokers. Buy some AAPL at a swiss broker and I’m pretty sure it’s going to be your swiss broker’s name too on the books of Depository Trust Company - the central US stock depository. It’s just how today’s electronic trading works. It’s probably similar in some other countries, but these things are not really my area of expertise.

In US at least an alternative you can elect for is “Direct Registration System”, where your stock ownership is recorded directly with the stock’s issuer. If issuer goes belly up, the chances are his stock’s most likely a zero too, so there should be little extra risk here. But trading is a hassle, whenever you want to trade you’ll need to transfer shares back to the broker.

We discussed the issue of estate tax already in another thread: The $60'000 cap for US investments

I don’t know who imposed or chosen 50’000. But I think, it would be different with each provider and also on the index liquidity .
Let’s take an exemple: Lyxor MSCI China A Fortune SG (DR) UCITS ETF (FR0011720911)
The fund has 51.5 millions euros. If the market maker creates 50’000 shares, it would be 50000*124.34=6’217’000
More than 12% of the fund value.

Well, I checked the typical daily trading volume of a few ETFs:

  • VTI: $1 million - $3 million
  • VT: $300k - $1 million
  • SPY: $50 million - $60 million
  • VUSA CHF: 10k - 50k shares
  • VEUR CHF: 0 - 4k shares

It looks like the difference between VT and VTI is not so big, not as big as the fund sizes would suggest. If you really care about liquidity, you should go for SPY. But then I guess it is the question of trusting SPDR or Vanguard.

Currently the SIX website shows a bid/ask spread of around 1% for VUSA and VEUR, but I think when I was buying them during the day, the spread was just a few rappen, for an asset that sometimes has no trades done in an entire day.

SPY is a very reasonable choice, one of the oldest and most established ETFs out there, but VTI has an edge over it in slightly lower fees (0.07% vs 0.10%) and mid/small cap coverage. VTI is also a share class in Vanguard’s corresponding mututal fund, which is roughly double the size of SPY ($596B vs $244B for SPY), don’t misjudge it just based on the size of VTI alone

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Do I understand it right: CT with stash < 100k; IB stash > 100k ? (Assumptions: mainly US domiciled ETFs; trading 1-2 times a year; investments 10kCHF/year; investing/rebalancing 1xyear with investment amount)

On a separate note: Does anyone consider Brexit issue in regards to IB (its headquarters, legislation, non-existing (exaggerating) future agreements with rest of Europe)? I read somewhere that some banks consider moving their headquarters to Europe / outside of UK due to Brexit. Of course the topic is more complex than that, but shouldn’t IB users residing in CH consider/anticipate the upcoming changes somehow?

Nope. IB with > 100k and IB with < 100k.

I don’t think it will be an issue for CH - they have different agreements with UK. If IB will move to EU, that wouldn’t change much, as CH has agreements with EU as well. I think CH is pretty much safe it this case. The problem is more related to Brits living in EU and EU-ers living in UK.

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IB is the cheapest outside Switzerland.
However, if you would like an account in Switzerland CT or Swissquote are good choices

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By the way, IB UK actually has offices in Zug and their helpdesk number is also a swiss one. Not that it matters, just a fun fact.

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I just opened an account at Cornertrader to serve as a backup to IB. I’m not too happy that it takes 3 days after making a transfer to IB for my cash to “settle”. That makes it very hard to quickly act on drops in share price, and if I keep lump sums in my IB account then I will incur negative interest. Also there is just something so user-unfriendly about the IB system and even though I do not think it will be too complex for my purposes, it certainly does not warm my cockles and I do not like the multiple separate interfaces or the mobile token login system either.

Sure Switzerland is more expensive to trade, CT costs approximately 40hf total in commission and stamp duty for a 15000 trade (Postfinance AG double that at around 80chf!) but there is something to be said for the comfort, ease and convenience of having your chickens roosting in your own back yard.

If only Postfinance AG would cut their rates down to Cornertrader levels I would stay with them for the lovely interface and the ability to instantaneously transfer cash between my main and trade accounts.

Choices, choices.

It doesn’t, you can trade as soon as the money is received by IB. CHF transfers to them done via SIC (“ch iban”) are cost efficient and very fast - I can wire the money from my cantonal bank account and have it available for trading within 2 hours and paying 0 in fees

You can always also trade on the margin. Interest rates are extremely low. In fact, if you transfer money with 2 or 3 business days it won’t even be charged, it’s only charged on settled balance

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