Please Note:
If you are outside Europe and the US, please be sure to read thru the comments on this post. They have become a valuable forum for investors from all over the world.
Who knew?
Certainly not I.
This all started when I wrote a series of letters to my daughter about financial stuff I felt was important for her to understand. Stuff she wasn’t yet ready to or interested in hearing. (I’m still waiting, Sweetie.)
I mentioned this to a couple of friends and, at their request, shared the letters. They encouraged me to put them on a “blog” as “posts” so my family and the rest of my friends might read it. And so they could more easily pass it on to theirs. One of them pointed me to WordPress.
I simply never dreamed an audience would develop beyond my little circle of friends and family. That’s not false modesty. I quite literally had no idea blogs could or did have larger readerships.
When I started this one, I barely knew what a blog was. In fact, the first blog post I ever read was my own. Then I began reading James Altucher, one of the first people to encourage me on this path. It was probably six months or so later before I stumbled on ERE. And then MMM. And then, and then, and then…
So as you might imagine, it really rather stunned me to see jlcollinsnh develop an international readership. Boy howdy! Given my love of travel, this remains quite the thrill. I first noticed it about ten months in and shared my discovery with the post Where in the World are You.
So far this month, there have been 85,706 page views and of those, fully 12,006 are outside the USA. Collectively, the countries of Europe are the second largest market.
But for these readers, the information here tended to come up short. The problem is, the investment tools we have so easily available here in the USA are either very costly or simply unavailable to the rest of the world. And since I know nothing about the specifics of what is available in the rest of the world, other than the core principles of investing described in this Stock Series, there was little here to help.
Not to say I didn’t try. The second half of the post What if you can’t buy Vanguard addresses it a bit. And I am very pleased to see the comments section of that post has become a sort of Forum where my international readers have posted their own experiences and questions.
Fortunately, Mrs. EconoWiser of the Netherlands is here to help. As you might guess from the name of her blog, she writes about living and spending efficiently. But around about March of last year she began reading jlcollinsnh. And she noticed the woeful lack of specific guidance as to how to implement the ideas here. But rather than throw up her hands, she set about figuring it out.
She’s done a brilliant job and, if her name sounds familiar, it might just be because I’ve had the frequent occasion to link to several of her posts in helping my European readers. Her research and insights are that impressive. So much so, in fact, I’ve come to think of EconoWiser as the European division of jlcollinsnh International. Egotistical and presumptuous on my part perhaps, but there you have it.
With all this in mind, about a month ago I asked her to write this guest post summarizing her low-cost index investing strategies for Europeans.
If you live in Europe, this is a must read.
If you live in another part of the world, maybe it will inspire you to follow her lead and figure it out for where you are. (And I’ll have another guest poster!)
If you live here in the USA, read it and appreciate just how easy and inexpensive the options we have here are.
But wherever in the world you are: Enjoy!….
It’s an honour to write a guest post for this wonderful blog. My “uncle J.”, as I like to affectionately call him, has taught me so many things about life and index investing. As a newbie on the index investing topic I decided to check out how this works for Europeans. As I’m a Dutchie myself, I was eager to find out how to make this index investing miracle work for the Dutch and consequently my fellow Europeans. This post will provide a rather general overview of my findings so far.
The Strategy
You should be familiar with J’s strategy if you’ve read the stock series on this magnificent blog. (If you haven’t, you should read the series first and read this blog post afterwards) A summary:
- If you can do business with Vanguard, do so as they are the only investment company out there that puts the interests of their customers first
- Buy broad-based index funds
- Costs matter hugely
- Keep it simple
And I’ve got some good news for you: we can apply the jlcollinsnh index investing strategy in Europe as well! Yay!
Investing With Vanguard In Euros
Unfortunately, you can’t open an account with Vanguard in Europe as a private investor. Unless you have €500,000 ready to invest (in which case: well done you!), you’ll have to go through a broker. Yes, let’s envy the American index investors who are able to open an account with Vanguard directly for a moment here and then let it go.
Vanguard Europe currently holds offices in seven European countries. You can contact your Vanguard office in: Denmark, France, Germany, The Netherlands, Sweden, Switzerland and the United Kingdom. Staff are very friendly and helpful, you can ask all sorts of questions about their products. However, they won’t give you investment advice. If Vanguard doesn’t hold an office in your country I suggest you go to the Vanguard global portal and click on the United Kingdom. Click on individual investors and then exchange-traded funds or mutual funds (I will explain the difference shortly). You will find all the information you’ll need. I am referring to the British Vanguard website ,even though all European Vanguard website content is in English.
Disclaimer: please bear in mind that when investing with Vanguard Europe you are NOT investing with the American cooperative non-profit organisation. Vanguard Europe is an independent subsidiary. In my humble opinion their philosophy matches the American parent company exactly. However, it is not a cooperative non-profit organisation in and of itself.
Let’s do something useful with our euros instead. http://www.megagadgets.nl/en/euro-toilet-papier.html
Vanguard Mutual Funds Vs. Vanguard ETFs
First things first, you need to decide whether you want to invest in mutual funds or ETFs (Exchange Traded Funds). In this article I will assume that you want to invest in Vanguard ETFs. The reason for my assumption is that ETFs are index funds that trade on the major stock exchanges and are traded like stocks. Mutual funds might be a bit more difficult to buy for some Europeans. Vanguard ETFs have lower expense ratios compared to the Vanguard mutual funds. They can be bought and sold throughout the day instead of once a day at closing prices. As we do not have IRAs or 401(k) plans to take into consideration, ETFs are a great option for European investors. ETFs pay out all dividends which you will need to reinvest yourself, whereas a mutual fund automatically reinvests the dividend for you. However, transaction costs might be lower for mutual funds if you can obtain these through a broker specialised in index investing.
An overview:
| Vanguard Mutual Funds | Vanguard ETFs |
| Higher total expense ratio | Lower total expense ratio |
| Can be bought and sold once a day at closing prices | Can be bought and sold throughout the day like regular stocks |
| Might be a bit more difficult to buy | Accessible to all Europeans |
| Option to automatically reinvest dividend | Dividend is paid out, which you might want to reinvest yourself |
| Transaction costs might be lower through a broker specialized in index investing | Regular broker fees apply, however there are cheap ones out there |
| Very interesting for smaller amounts of money on a monthly basis due to brokerage commissions (if available) | The higher the amount you want to invest, the more interesting concerning brokerage commissions, great for lump sums |
In this blog post I’ll focus on stocks-only. The same strategy applies to bonds (and REITs if you’re investing in dollars).
Here’s the Vanguard ETF selection you, as a European, are able to choose from:
| Vanguard exchange-traded funds | TER | Available currencies | ISIN |
| Vanguard FTSE All-World UCITS ETF | 0.25% | USD/GBP/EUR/CHF | IE00B3RBWM25 |
| Vanguard FTSE All-World High Dividend Yield UCITS ETF | 0.29% | USD/GBP/EUR/CHF | IE00B8GKDB10 |
| Vanguard FTSE Dev. Asia Pac. Ex Japan ETF | 0.22% | USD/GBP/EUR/CHF | IE00B9F5YL18 |
| Vanguard FTSE Developed Europe UCITS ETF | 0.15% | GBP/EUR/CHF | IE00B945VV12 |
| Vanguard FTSE Emerging Markets ETF | 0.29% | USD/GBP/EUR/CHF | IE00B3VVMM84 |
| Vanguard FTSE Japan UCITS ETF | 0.19% | USD/GBP/EUR/CHF | IE00B95PGT31 |
| Vanguard S&P500 ETF | 0.09% | USD/GBP/EUR/CHF | IE00B3XXRP09 |
| Vanguard FTSE 100 UCITS ETF | 0.10% | GBP | IE00B810Q511 |
| Vanguard Government Bond UCITS ETF | 0.12% | GBP | IE00B42WWV65 |
All hyperlinks link to U.K. factsheets. However, the facts are similar for all European countries (even if there isn’t a Vanguard office in your country).
Obviously, we’re investing in a European currency here. I will discuss investing with dollars later on in this article.
Buy Broad Based Index Funds
If you check out the different prospectuses you’ll quickly come to realise that there’s a one-stop shopping option for all your diversification needs. That would be the Vanguard FTSE All-World ETF at 0.25% TER. Through this fund you’re investing in 2,900 holdings in nearly 47 countries, including both developed and emerging markets. The fund covers more than 90% of the global investable market capitalisation. This way there’s no need to mix U.S., European and emerging markets yourself as the fund has already done this for you. Unfortunately, it doesn’t include small cap. I’m not telling you what to invest in here, do whatever floats your (Vanguard) boat.
Floating boat. Not photo shopped, the water in Greece is just that clear. http://www.mymodernmet.com/profiles/blogs/magical-boat-floating-on-water
Here’s the lowdown on the fund:
| Vanguard FTSE All-World UCITS ETF | |
| ISIN | IE00B3RBWM25 |
| Greater Europe | 27.36% |
| Greater America | 52.25% |
| Greater Asia | 20.39% |
| TER | 0.25% |
Find a broker – costs matter hugely
Now that you’ve checked out the different options in mutual funds and ETFs you’re going to find yourself a broker. You’ll need to invest a couple of hours of your time to find out which one suits your needs best. Google is your friend. Obviously, costs are very important. In The Netherlands we have many wonderful online brokers now, which offer accounts at rock bottom costs and will only charge transaction fees. Check out and compare transaction fees, custody fees, membership fees, and service fees. If you’re not charged for opening an account, why not open several accounts with different brokers so that you can also check out their interface and what not? Oh, and phone them. Ask them lots and lots of questions.
Before We KISS, There’s The Tax Thing
There’s this thing called the dividend leakage, and it’s a pain in the backside for investors. Unfortunately, it’s a significant cost for investors. As most of the European Vanguard funds are domiciled in Ireland you need to be aware of the Irish double taxation agreement. A (non-Irish) European investor is charged dividend withholding tax by the Irish government. Whereas the Irish investor can claim this dividend withholding tax back from their government, the rest of us (in most cases) can’t. You can ask your national tax department on your country’s dividend tax treaty with Ireland. The EU does not approve of this tax, but there is nothing you can do about it. You might want to check out investing with Vanguard in dollars. Hey, what a coincidence. I’ll go through that option in a minute. If not, you’re just going to have to suck this one up.
Let’s Keep It Simple, Sweetheart!
If you follow these steps you will have identified which fund(s) you are willing to throw your cash at (on a monthly basis?), have found the best and cheapest broker because costs matter hugely and you will have accepted the fact that there is a dividend leakage (or have tried to work your way around it…or have given up on investing after all…don’t!).
Yes, but…what about the dollar version? Oh, so you don’t want to KISS just yet? Okay, here we go!
No thanks. http://www.theguardian.com/music/2011/aug/16/michael-jackson-kiss-tribute-concert
Investing With Vanguard In Dollars
Again, you want to buy broad based index funds. Of the many Vanguard funds you will be able to choose from through your broker (which we’ll select later on) I chose two different options to illustrate how to go about investing with Vanguard in dollars. You can also buy bonds and REITs through your broker specialised in international stocks. However, for simplicity’s sake I’m referring to stocks-only here. Oh, and make sure you check out Morningstar when comparing funds.
| Vanguard Total Stock Market ETF | Vanguard Total World Stock Index ETF | |
| Ticker | VTI | VT |
| ISIN | US9229087690 | US9220427424 |
| U.S. | 98.35% | 53.38% |
| Greater Europe | 1.56% | 26.63% |
| Greater Asia | 0.10% | 19.99% |
| Amount of stocks | 3609 | 5109 |
| TER | 0.05% | 0.18% |
Option number one is the Vanguard Total Stock Market ETF, which is as close to J’s favoured VTSAX as we can get. However, as a European investor you’d be investing almost entirely in U.S. stocks. Option number two is the Vanguard Total World Stock Index ETF. This will give you a one-stop shopping experience and all the diversification you’ll need over all markets. (Also recommended by Malkiel and Ellis in The Elements Of Investing, p. 122)
Again, Find Your Broker
You’ll want to do another research on finding the best and cheapest broker for your dollar stocks. It could just so happen that the best and cheapest broker for your transactions in euros does not fit the requirements for your dollar transactions. Google is your friend, once again. Check out and compare transaction fees, currency exchange fees (very important in this case!), custody fees, membership fees, and service fees. You also want to inquire after the broker’s custodian, which might not find itself in your home country. This shouldn’t be a problem, you just want to know where your stocks are if ever you need to reclaim them if your broker goes bankrupt.
Not Another Tax Thingy?!
Yep, another tax thingy. See, the U.S. government will charge up to 30% dividend withholding tax. However, that depends on your country’s dividend tax treaty with the U.S. My country has a cool deal with the U.S. and thus my dividends will be charged with a 15% withholding tax instead of 30%. The remaining 15% withholding tax can be reclaimed by filling in a W-8BEN form. You should renew this every three years. If you’ve found yourself a broker specialised in investing in dollars, they’ll probably know how to handle this. Ask them about the form. My broker will automatically send me a new form every three years which I can sign online. No biggie. You could also contact your national tax department in order to require after the rules that apply to your specific situation.
Currency Risk
You probably guessed that you’ll need dollars in order to invest in dollars. It’s important that you find a broker who will exchange your euros for dollars at rock bottom costs. However, you also need to bear currency risk in mind. As you live in Europe, you’ll probably want to cash out in euros someday. If the dollar has devaluated strongly against the euro at that point in time, you might be disappointed. Consequently, if the dollar thrives and the euro doesn’t, you could be in for a windfall. Who knows? Maybe it’s also not all bad news when thinking about long-term investors. Come to think of it, when investing in euros your cash is also transferred into dollars but you just don’t see that happening. The base currency of the index will be in dollars anyway. Investing in euros in international stocks does not totally protect you against currency risk either.
Scary stuff, right? Now, there’s a way to sort of insure yourself against this currency risk. It’s called hedging, it doesn’t come cheap (that’s an understatement) and my guess is uncle J. probably won’t be a huge fan either. It sort of comes down to you adding euros to your brokerage account. Instead of transferring your euros into dollars, you’re borrowing dollars against a certain rate. You’d then be paying interest on that loan. As we’re long-term investors this would destroy our profits. So let’s just forget about it. I’ve mentioned it, and that’s that.
http://www.colordarcy.com/wordpress/currency-risk-%E2%80%93-should-property-investors-worry/1919/
KISS
Now that you have investigated the different options for investing with Vanguard in euros and dollars you can make your own risk analysis. Take into account things such as currency risk, costs, dividend leakage and broker bankruptcy risk (custodian is important here). Choose your strategy and stay the course for the next thirty odd years or so.
You’ve solved the index investing in euros puzzle! http://www.financialdirector.co.uk/financial-director/research/2201152/rel-working-capital-survey-2012
Or the dollar version! http://www.bestsmallbizhelp.com/2011/08/small-business-funding-tips-borrowing-from-banks/dollar-puzzle/
Good luck!
Love,
Mrs EconoWiser
Disclaimer: I am not a professional investor or financial adviser nor do I claim to be one. You are solely responsible for your own financial investment choices. I am not responsible for inaccurate information in this blog post. I am merely sharing ideas and findings of my very amateurish investigation in index investing for Europeans.
Addendum: Want to translate this blog from English to another language? Google Translate makes it easy. Just click on the link, type in jlcollinsnh.com and choose the language you prefer. Click on the link for that language and you’re done!
Addendum 2: More for investors outside the US…
An International Portfolio from The Escape Artist
NOTE:
Be sure to read the comments to this post. There is a wealth of additional information in them. My thanks to those who have contributed!