TER/Tax optimized portfolio

I’m quite new to this forum and I found the wealth of information brilliant. After a lot of reading I’m trying to tax optimize my portfolio and it would be great to get your feedback.

I’m aiming to have a portfolio as close as possible to the VT Vanguard Total World Stock Market (0.08 TER) that is TER/Tax optimized for a Swiss investor while not being overly complicated.

After some research I came up with the following portfolio:

  • 50% US Markets (0.03 TER) VTI - Vanguard Total Stock Market - Domicile: USA
  • 15% Emerging Markets (0.10 TER) VWO - Vanguard FTSE Emerging Markets - Domicile: USA
  • 12% European Union (0.12 TER) CSEMU - iShares Core MSCI EMU UCITS - Domicile: Ireland
  • 10% Asia Pacific (0.08 TER) VPL - Vanguard FTSE Pacific - Domicile: USA
  • 7% United Kingdom (0.07 TER) ISF - IShares Core FTSE 100 UCITS - Domicile: Ireland
  • 6% Switzerland (0.10 TER) CHSPI - iShares Core SPI - Domicile: Switzerland

As you can see the above portfolio covers approximately 95% of the VT. The reason I’m not picking an ETF for MSCI Europe is that it would contain approximately 16% Swiss companies and that wouldn’t be tax optimal. The overall TER of the above portfolio is 0.063 which is even better than 0.08 from the VT ETF.

I’m wondering about three things:

a) What are your general thought about the above portfolio. Is it TER/Tax optimized? What would you change?
b) Are “German ETF’s” domiciled in Ireland tax optimized or should I aim for an DAX ETF based in Germany and split up the EMU ETF?
c) TER/Tax wise, what’s the better choice for emerging markets/asia pacific ETF’s. The above VWO based in the US or ETF’s with a sligthly higher TER (0.15) based in Ireland/Luxembourg?

Looking forward to your input!

Where is Japan???

Good point, just included asia pacific which increased the coverage rate of the portfolio from 85% to approximately 95% of the total world stock market.

Japan has been a terrible investment lately, hasn’t it? Genuinely asking.

For your aim of replicating VT, I find it already “overly complicated” as it stands, to be honest.

You probably mean “0.063 percent”. The difference to 0.08% is probably below measuring threshold. Also, keep in mind that lower TER on paper doesn’t necessarily mean that your returns are going to be higher by that very same margin. I’ve seen examples where funds with slightly higher TER fared better than seemingly “cheaper” ones.

I’ve previously posted about it.

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It took 2 decades for the Nikkei 225 to retrace back from P/E=95 to reasonable levels.
It is fairly valued now and not out of line with other markets.

Thanks for taking the time to study my portfolio and also for your response:

You’re making a good point and I agree that a TER difference of around 0.05 % is probably not “measurable”. However, my reason for choosing the above portfolio is not only to TER- but also to tax-optimize. This brings me to your statement in the previous thread:

I read on the Mustachian Wiki and also on other websites that the withholding tax can make a difference of up to 1.00 % per year.

Assuming an investment of CHF 100’000.- with an expected return of 8% p.a. and the compounding effect of 20 years this can lead to quite some savings:

Delta in Costs Total Savings
0.05 % CHF 4’335.-
0.10 % CHF 8’708.-
0.20 % CHF 17’570.-
0.30 % CHF 26’589.-
0.40 % CHF 35’768.-
0.50 % CHF 45’109.-
0.60 % CHF 54’615.-
0.70 % CHF 64’289.-
0.80 % CHF 74’133.-
0.90 % CHF 84’151.-
1.00 % CHF 94’345.-

In order to “unlock” these savings (even just the CHF 8’708.- with a cost difference of 0.1%) all I have to do is to find a combination of tax/ter optimized funds. From there investing in 6 instead of 1 funds is not too much of a hustle and the fee’s with IB are negligible. Isn’t that worth it?

To quote the post behind that link:

“a Swiss investor holding shares of VT will effectively receive only (1-0.3)(1-0.35)=45.5% :scream: of the dividends UBS distributes to VT. This is significant, as it roughly equates up to 1% cost p.a. (assuming the dividend yield is 2%)”

That statement is plainly wrong.

Average dividend yields in developed markets are between 2 and 3%. Residual withholding tax isn’t anywhere near 33 or 50%. For U.S. securities through VT, it is in fact zero. Also…

The U.K. will (generally) have no withholding tax on dividends. So no further optimisation here.

Half of last dividend paid by UBS (which is half of UBS’ 2020 dividend paid in 2 times) was tax free. So no swiss whitholding tax.
¨
EDIT : UBS dividend for 2017, 2018 and 2019 were 100% tax-free.

I think I found the answers to questions b) & c):

b) Are “German ETF’s” domiciled in Ireland tax optimized
It looks like Ireland has 9 double taxation treaties with EU countries and Germany is one of them. Luxembourg apparently has 8 treaties but in practices it looks like there is hardly a big ETF performance difference between the two. That means I’m going to stick to an EMU fund based in Ireland.

c) TER/Tax wise, what’s the better choice for emerging markets/asia pacific ETF’s.
I found a document with a list of countries with a double taxation treaty with the USA under the following link:

https://www.swissbanking.org/de/themen/steuern/fatca-foreign-account-tax-compliance-act/us_treaties_english.pdf

As China and Japan are the biggest chunks in the EM ETF resp. Asia Pacific ETF, my selected Vanguards ETF’s based in the US appear to be TER/TAX optimized and I’m sticking to them.

@San_Francisco & @REandSTOCK thanks for your answers.

So you would argue that because of all the US double taxation treaties, the zero withholding tax in the UK and the situation like with UBS, where there is no withholding tax on Swiss dividends, there is basically no significant TER/Tax advantage between choosing the VT and an portfolio that is split up like mine?

How representative is the UBS example for the overall Swiss market? Just wondering because a lot of sources (NZZ, Cash, VZ) are arguing that Swiss investors should be careful to pick SMI/SPI ETF’s that are located in Switzerland and not abroad.

CHSPI for example, has a yearly special dividend (the last one) that regroups all the tax-free dividends it received during the year. That means there is no whitholding tax outside the fund as well for these companies’ dividends. If you have VT, you will have your 15% whitholding tax when you get dividend from the fund. You will be usually able to recover those 15%, but sometimes not, and you need to do the work.

The sole fact that the U.S. have a DTA with Japan and China does not necessarily (in and by itself) mean that a U.S. ETF would be most efficient tax-wise. It depends on the applicable tax rate.

Also, the PDF that you linked isn’t relevant with regard to the treatment and withholding tax on Asian dividends paid to a U.S. fund.

Where to?
Did you mean UBS dividend payments to foreign ETFs were free of withholding tax?

I think it’s not a good sign if an ETF outperforms other ones based on the same index. An ETF is meant to hug the index as much as possible.

Btw I once tried to compare VT with VWRD, but the different close price time points, difference absolute unit price, different dividend dates and values made it challenging. I wanted to see how much is truly lost when holding VWRD.

Yes. (Tax-free in general.)

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Eventually every one is going to lag the index. The question is how much.
No ETF will perfectly replicate the index (especially not the physically-replicating).

I happen to have previously posted about this is as well, taking and compiling actual price/NAV and distribution numbers.

Result: roughly 1% over a period of 6 years. Not a figure I’m going to lose sleep about.

Both follow different indices, but that shouldn’t make much of a difference either.

CHSPI paid 16.4% of its 2019 dividends and 17.8% of its 2018 dividends free of tax.

In your calculation: did you reinvest the dividend? Was the withholding tax applied correctly in both cases? Did you make sure you compare start and end price for the same moment in time? LSE and NYSE have different trading hours. Imagine LSE closes the day on price X, then at NYSE it goes up a further 1%.

But even if it’s only 1% over 6 years, that’s an amount you can get practically for free.

All this work to save a little bit on taxes? Is it really worth the trouble?

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