The end of IBKR + VT: a cheaper, safer, less US-dependent alternative

[Mirager]

@leman

When gullible investors are not protected, no one is. I’m sure @Mirager has fun things to say about what happened to Greek retail investors over the past decades.

Oh yeah, most retail investors in Greece investing between 1998 and 2012 will likely never get their money back. It caused generational PTSD and suspicion/hatred of the stock markets. That’s what legal insider trading and extremely aggressive marketing combined with FOMO does, you had literal goatherders chatting about stocks in mountain villages which barely had steady electricity, yet every coffee house had stock tickers floating above their heads.

I just came back from holiday there in fact, and can report that youngsters (15-20 years old) are constantly talking about trading and stuff they most likely don’t understand, as they’ve been taken in my incessant social media marketing. Personally I can’t tell if this is a bubble of Greek stocks or not, time will tell.

Other than that I agree with you!

[Kokosnuss]

First of all thank you to the original poster. As IBKR and VT is a big part of my portfolio, this post is really triggering me to take action to spare my loved ones from dealing with the burden of US Estate taxes. And attending a funeral recently of a distant relative reinforced it.

So I was trying to figure out what can I do with minimal effort to mitigate this risk rather quickly. Could switching VT to European domiciled ETFs in IBKR help?

To avoid U.S. Estate taxes, the goal is to stay under the USD 60k limit for “U.S. situs” assets. Apparently cash held in a deposit account (not sure if IBKR qualifies as a deposit account) is exempted from the definition of U.S. situs assets. Most importantly, it seems UCITS ETFs are not considered to be U.S. situs assets (source: UCITS vs US ETFs: Tax, Withholding & Estate Tax Compared ).

So looking for feedback on the following two assumptions:

1. Cash held in IBKR is not considered as a U.S. Situs Asset
2. UCITS ETFs are not considered as U.S. Situs Asset

[Brndete]

@Kokosnuss

2. UCITS ETFs are not considered as U.S. Situs Asset

Correct, the assets matter, not the broker. An IE-ISIN on IBKR isn’t in scope. An US-ISIN on Swissquote is.

[leman]

@Kokosnuss

First of all thank you to the original poster. As IBKR and VT is a big part of my portfolio, this post is really triggering me to take action to spare my loved ones from dealing with the burden of US Estate taxes. And attending a funeral recently of a distant relative reinforced it.

I am very sorry for your loss. These moments make us reflect on life, love and death, and what’s a life well-lived. They also remind us how ridiculously absurd it would be to focus on tiny amounts of money instead of the well-being and the peace of mind of our loved ones

@Kokosnuss

Cash held in IBKR is not considered as a U.S. Situs Asset

Assuming you are a Swiss resident, you probably contracted with IBKR UK, meaning that the underlying custodian is the US entity IB LLC. It would have been a different story with Irish accounts because the custodian would be IB IE, an Irish MiFID firm.

I’m no lawyer but you might want to read IRC §2105(b). Did I mention that the US tax system is horrendous?

In a nutshell, it excludes bank deposits from US-situs for non-resident aliens’ estate tax purposes.
I repeat: that exclusion applies to deposits at banks. A brokerage cash balance is generally viewed as a debt/receivable owed to you by the broker.

Except in very niche cases, I don’t see a reason to hold uninvested foreign cash, returning a negative yield in Swiss francs on average. The general Swiss public is better off holding Swiss francs at a regular bank, with a guaranteed positive yield so far.

@Kokosnuss

So I was trying to figure out what can I do with minimal effort to mitigate this risk rather quickly. Could switching VT to European domiciled ETFs in IBKR help?

Yes, you can just sell US-situs assets and get some UCITS instead. If you want to do it at the same broker, they will take 5 bps in transaction fees. There is a fee cap for larger amounts though.

Yesterday’s conversation was about new trackers being generally cheaper than established ones, which is confirmed by this morning’s new listing of iShares FTSE All World UCITS in Swiss francs.

iShares FTSE All World UCITS ETF USD (Acc) ETF Price & Performance - FTAW | SIX

[qwertzuiop]

Cool, I requested them to list it in CHF at Six when they launched it

[leman]

Thank you! Could you please negotiate with Amundi as well ?
Only the distributing version of Prime All Country is listed in Swiss francs.

[qwertzuiop]

If I was able to do it, you can do it, too just reach out to them

They already listed WEBG in CHF on Six upon request (wasn’t me)

[Abs_max]

Yes your assumptions are correct

[assemblyrequired]

@assemblyrequired

I will post the formula here when I have the time to put everything together; not before Sunday though.

I got PTSD when I revisited the formula in the sheet. It’s a bit complicated. But here goes:

The main formula

The main formula is FV. Because we want to be able to model monthly contributions, we use monthly values for its arguments. Those are:

1. monthly return
2. investment duration in months
3. monthly contributions (× −1, as amounts deposited need to be input as negative)
4. starting sum (× −1, as amounts deposited need to be input as negative)

1. Monthly return

The average yearly stock market return is 7%. From this, we subtract:

• TER
• irrecoverable withholding tax (see below)
• income tax (see below)

This gives us the average yearly net return. Then we need to convert this value to a monthly return:
(1 + yearlyNetReturn)^(1 ÷ 12) - 1 = monthlyNetReturn

Irrecoverable withholding tax

• For this we assume the index contains 62% US companies.
• US dividend yield is 1.2%, and ex-US dividend yield is 2.5%.
• Level 1 (L1) withholding tax is what is withheld when dividends get transferred from the companies to the fund, and L2 WHT is what is withheld when dividends are transferred from the fund to us.

US-domiciled

There are two things reducing recovery of WHT: lost ex-US L1 WHT and DA-1 losses.
lostWHT = lostexUSL1WHT + lostDA1

ex-US dividends have an average level 1 withholding tax of 10% for funds based in the US, which is lost forever:
lostexUSL1WHT = exUSWeight × exUSDividendYield × exUSL1WHT_USFund
0.38 × 0.025 × 0.1 = 0.00095

We also get US withholding tax credited via DA-1. We don’t get any credit if the amount isn’t at least CHF 100 (ignored in this calculation), or, depending on our financial situation (mortgage, average tax rate etc.), we may not get the full amount credited. And we don’t get the credit immediately, so we lose out on stock market returns on that money:
lostDA1 = (USWeight × USDividendYield + exUSWeight × exUSDividendYield × (1 − exUSL1WHT_USFund)) × USL2WHT × (DA1CreditRate × yearlyStockMarketReturn × yearsUntilDA1Received + (1 − DA1CreditRate))
If we get 100% credited after 1 year (the optimum), we get:
lostDA1 = (0.62 × 0.012 + 0.38 × 0.025 × (1 − 0.1)) × 0.15 × (1 × 0.07 × 1 + (1 – 1)) = 0.000167895
And if we get the 90% credited after 1½ years, we get:
lostDA1 = (0.62 × 0.012 + 0.38 × 0.025 × (1 − 0.1)) × 0.15 × (0.90 × 0.07 × 1.5 + (1 – 0.90)) = 0.00046650825

IE-domiciled

For funds based in IE, US dividends have a level 1 withholding tax of 15% and ex-US dividends have an average level 1 withholding tax of 12%, both of which are lost forever:
lostWHT = USWeight × USDividendYield × USL1WHT + exUSWeight × exUSDividendYield × exUSL1WHT_IEFund
0.62 × 0.012 × 0.15 + 0.38 × 0.025 × 0.12 = 0.002256

Income tax

US-domiciled

lostToTaxes = (USWeight × USDividendYield + exUSWeight × exUSDividendYield × (1 − exUSAverageL1WHT)) × marginalTaxRate

IE-domiciled

lostToTaxes = (USWeight × USDividendYield × (1 − USL1WHT) + exUSWeight × exUSDividendYield × (1 − exUSL1WHT)) × marginalTaxRate

2. Investment duration in months

This should be self-explanatory. If not, let someone else handle your finances

3. & 4. Monthly contributions and starting sum

Here, we subtract the buying fee and stamp tax.

IBKR

For simplicity’s sake we use automatic currency conversion (fee of 0.03%) and fixed pricing, although the calculation is still a bit complicated, as fixed pricing is at least USD 1 and at most 1% of trade value, but still depends on the number of shares (USD 0.005 per share). I left out the “max 1%” part as it only triggers with shares under USD 0.50.
netContribution = contribution × (1 − 0.0003) − MAX(1, (contribution × exchangeRateCHFUSD × (1 − 0.0003)) ÷ approximatePriceOfVT × 0.005) ÷ exchangeRateCHFUSD

Saxo

This can be cheaper if you are on a higher customer level. On the lowest level, the fee is 0.08%, but at least CHF 3. Stamp tax is 0.15%. I assumed we are buying ETFs in CHF on SIX, feel free to change this if you prefer to buy funds in other currencies.
netContribution = (contribution − MAX(3, contribution × 0.0008)) × (1 − 0.0015)

Putting it all together

The final formula now is:
FV((1 + (yearlyStockMarketReturn - TER - lostWHT - lostToTaxes))^(1 ÷ 12) - 1, investmentDurationInMonths, netMonthlyContribution × −1, netStartingSum × −1)

[Abs_max]

I did similar calc for WEBG_Saxo vs IBKR_VT and the difference in Final value after 20 years of investment (monthly contributions) was 1.3%.

Simply put WEBG_Saxo would achieve the final value (after 20 years of investments) of 98.7% vs 100% for VT at IBKR. This can be seen as „huge“ or „not much“. Depends on perspective of the investor. But we need to recognise that 1-2% could be move in price of ETF over a week.

I assumed 5% gross annual return as we are looking at CHF based investor.

[nabalzbhf]

@Abs_max

I did similar calc for WEBG

btw, aren’t dividends in USD? (tho likely FX cost of that is negligible)

[Abs_max]

Yes. I ignored that.
For a portfolio of 1 million CHF, dividend FX conversion would be 37.5 CHF on Saxo assuming people will convert back to CHF and not simply buy WEBG_USD with dividends.