Emerging Market Bonds

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peteyperson
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Emerging Market Bonds

Post by peteyperson »

I recall from the thread on asset allocations that at least one person has invested in Emerging Market Debt. This was recommended by Morningstar a little over a year ago and has done well since then, but it is a relatively new asset class.

I wanted to see if we could strike up a discussion on the merits or lack thereof of emerging market debt investment vs EM stocks. Were their specific factors that made the timing favourable and not so a long term investment? Are they the sort of high risk investment that might warrant a 1-2% investment and if so, why? The annualised return pre-costs has been 17% on top funds that invest in this area over the last five years.

I recently looked at a 'high income' bond fund here in the UK, comparing it a lower return bond fund. The first invested in BBB and below only, the latter in Treasury debt and only AAA, AA, A and some cherry picked B's. Whilst the premium was 3% higher on the higher risk debt, I figured that there was next to no risk of default on the latter investment but I might have to factor in a loss of principle when some of the more risky debt defaults on the higher income fund. I figured with the higher dividends eating up yearly tax allowances, I'd have to re-invest inflation and possibly add a guess of 2% extra to cover possible defaults. I also considered that during times of poor equity performance like a recession I would be relying on the fixed income investments for income or sell them outright if I needed the cash, contrastly at a time when I needed the money back the most I thought it likely the lower quality debt defaults might increase dramatically. I wonder how emerging market debt might fit into this scenario albeit though it seems that it delivers perhaps enough return to cover a much higher level of default and still deliver solid positive returns.

Perhaps it should be viewed as part of an overall emerging market equity investment, allocating a portion of that money to the debt side rather than be considered part of a fixed income defensive allocation for when equities are down several years, dividends get cut and you desperately need cash to live but don't want to sell shares on the cheap.

Thoughts?


For reference:

Safer bond PDF
http://www.legalandgeneral.com/factsheets/pdf/FII.pdf

High Income fund PDF
http://www.legalandgeneral.com/factsheets/pdf/HIT.pdf

Morningstar emerging market debt article:
http://www.morningstar.co.uk/news/analy ... 2003-08-27

Thanks
Kramer
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Post by Kramer »

Hi Petey,

I won't attempt to completely answer your questions, but just throw in a few thoughts.

Emerging market (EM) bonds are denominated in dollars so there is no currency diversification effect like there is with developed market bonds. So I would put EM bonds below developed market bonds in portfolio importance for that reason.

There are no passive index-fund like vehicles to invest in EM bonds. If I remember correctly, the best low cost funds in this area are something like .85% expense ratio. So implementation of this strategy is not optimal. Sorry, links to a couple of inexpensive funds are on my other computer.

There are two schools of thought on bond investing -- 1) that bonds should only be used to increase portfolio security (which would definitely mean leaving out EM bonds) or 2) that one should slice and dice the bond portfolio just like you might do with your stock portfolio.

There are a limited number of EM bond opportunities, which, when combined with the absence of passive investing alternative, leads to less than optimal diversification for the funds involved.

I am a big believer in the EM equity class and have had a large investment there in VEIEX for some time. When you think about it, EM equity should capture most of the risk factors of EM bonds, and there are better vehicles in EM equity (VEIEX, EEM, future VEIEX viper) to implement your strategies.

In any case, IMO the EM bond asset class should reasonably only be a very small percentage of your portfolio because the risk factors are mostly captured in other asset classes.

Kramer
peteyperson
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Post by peteyperson »

Hi Kramer,

I should interject as you don't know, I am British and so many of your points made are moot in my case. However, there were some interesting points nonetheless.

Expense ratios here are worse, standard is up to 5.25% sales load and 1.76% avg mgmt fee inc all extras. Same with EM bonds. There is no EM equity indexer available.

I am interested to hear more on slice and dice of bond funds. Could you elaborate on that please? I have several funds I'm considering re bonds. One invests in a mixture of UK Treasury & high grade UK Corp Bonds from big companies investors have heard of. Another is a very low cost 0.20% vs 0.50% for the fund just mentioned, a new ETF investing in European Corp. Bonds off all grades (an index effectively). I do have some concerns investing in bonds denominated in Euros as we're not yet switched over to it, bonds would be used as a 5 years cash cushion as previously described (for when equities are half price and I don't want to sell for living expenses). I had been considering taking 1 year of the 5 year investment, in the Euro ETF because it lowers the overall mgmt fee. If and when we move to Euros, I would consider 100% there because there's nothing comparable to 0.20% mgmt fee with no load here in the UK. That's like a dream and the €1.4Bn invested by European investors in 2 years flat demonstrates that! More low cost bond investments are planned in Europe too.

Another fund that caught my eye was govt debt from around Developed Europe in Euros again. Did carry at 5% load and 1-1.5% annual mgmt fee though which was less attractive.

Have you indexed the EM over the past few years or actively managed? How have you done? My data here shows the past decade did nothing and only actively managed funds eeked out a return on investment.
Kramer wrote: Hi Petey,

I won't attempt to completely answer your questions, but just throw in a few thoughts.

Emerging market (EM) bonds are denominated in dollars so there is no currency diversification effect like there is with developed market bonds. So I would put EM bonds below developed market bonds in portfolio importance for that reason.

There are no passive index-fund like vehicles to invest in EM bonds. If I remember correctly, the best low cost funds in this area are something like .85% expense ratio. So implementation of this strategy is not optimal. Sorry, links to a couple of inexpensive funds are on my other computer.

There are two schools of thought on bond investing -- 1) that bonds should only be used to increase portfolio security (which would definitely mean leaving out EM bonds) or 2) that one should slice and dice the bond portfolio just like you might do with your stock portfolio.

There are a limited number of EM bond opportunities, which, when combined with the absence of passive investing alternative, leads to less than optimal diversification for the funds involved.

I am a big believer in the EM equity class and have had a large investment there in VEIEX for some time. When you think about it, EM equity should capture most of the risk factors of EM bonds, and there are better vehicles in EM equity (VEIEX, EEM, future VEIEX viper) to implement your strategies.

In any case, IMO the EM bond asset class should reasonably only be a very small percentage of your portfolio because the risk factors are mostly captured in other asset classes.

Kramer
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ben
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Post by ben »

Hi Petey,
it was probably wild dog me who had the emerging mkt bonds. I use the closed end fund that trade like an ETF and therefore you can buy in the UK at any broker/bank trading the US market. It is a Templeton fund: TEI (E/R is 1.15% being low end of catagory). So no need to pay silly loads in the UK :D

There are other funds (incl. closed end) you can use. I use Ameritrade(in the USA) and they accept I buy US mutual funds even though I am a non-resident-alien! So that give the possibility for T.Row PRice: PREMX having 1.16% E/R. It is naturally more expensive to deal with this asset group than liquid/easy access USA bonds.

The performance you ask? Have the last 5 years of TEI here:
98: -14% 99: +10% 00: +16% 01: +23% 02: +14% ytd 03 I have not calculated, but if you do (it has done well), do not forget to add the healthy dividend yield.
As you can see; a fairly volatile asset group - but as we know; many volatile asset groups make a much less volatile overall portfolio (unless of course one has chosen asset groups correlated 100%).

Also; TEI is only about 50-60% based in USD so the many other currencies will help diversify currency wise.

It is about 10% of my total (excl. 1 rental unit) portfolio, and further hold another 10% in VEIEX emerging market Vanguard equity fund - I have apparently lots of faith in those markets :wink: and they have done me well lately for sure. My top winner is however still the 10% in the gold fund BGEIX...

Take care!
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peteyperson
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Post by peteyperson »

Hi Ben,

I am unclear how this can be accomplished. ComDirect, the largest UK broker only offers access to a certain number of US stocks but not all. I will look at Ameritrade. I am not sure of the legality of buying a US ETF or mutual fund when clearly they are not meant for that and I assume have regulations in place prohibiting it also.

Is this Ameritrade.com or Ameritrade.co.uk? Is there a specific page on the site you can point me to that has some information about what foreign investors can and cannot do?

Thanks,
Petey
ben wrote: it was probably wild dog me who had the emerging mkt bonds. I use the closed end fund that trade like an ETF and therefore you can buy in the UK at any broker/bank trading the US market. It is a Templeton fund: TEI (E/R is 1.15% being low end of catagory). So no need to pay silly loads in the UK

There are other funds (incl. closed end) you can use. I use Ameritrade(in the USA) and they accept I buy US mutual funds even though I am a non-resident-alien! So that give the possibility for T.Row PRice: PREMX having 1.16% E/R. It is naturally more expensive to deal with this asset group than liquid/easy access USA bonds.
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ben
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Post by ben »

Schwabb (USA) would NOT let me buy US funds and referred me to their foreign based department (where also can not buy US funds).

Meanwhile my worst case scenario is simply that Ameritrade one day will ask me to sell - and then I simply replace with ETFs and closed-end funds.
It is the fund companies imposing the rule.

Am naturally not an UK expert but in my Scandinavien home country I can simply walk into my bank and they will trade all stocks on the 3 major US exchanges. TEI trade in NYSE. Sure, a bank is a bit more expensive than an online broker, but beats the heck out of 5% loads and inflated E/R we are used to in EU! :lol:

God bless America! :D
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peteyperson
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Post by peteyperson »

So you think the mutual fund investment might be a bit questionable (don't want to put words in your mouth here) but you would sell them and still buy American based ETFs and closed-end funds from the US stock exchanges anyway?

What do you do about the tax form you have to fill in to state you are not from the US? Was that just a simple matter? Have they ever mailed you anything where it confirmed they were away you were not a resident? Did you not need a US Social security number as is normal in these circumstances? Checked out several US brokers but got told same as you did early on.

Tried looking up the S&P US Spider and could not get it to come up. TEI comes up tho. Could not get the AMEX sourced onces to work, what ticker symbols work for you?

Petey
ben wrote: Schwabb (USA) would NOT let me buy US funds and referred me to their foreign based department (where also can not buy US funds).

Meanwhile my worst case scenario is simply that Ameritrade one day will ask me to sell - and then I simply replace with ETFs and closed-end funds.
It is the fund companies imposing the rule.

Am naturally not an UK expert but in my Scandinavien home country I can simply walk into my bank and they will trade all stocks on the 3 major US exchanges. TEI trade in NYSE. Sure, a bank is a bit more expensive than an online broker, but beats the heck out of 5% loads and inflated E/R we are used to in EU! :lol:

God bless America! :D
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Post by ben »

I believe that the mutual fund companies can not sell directly to foreigners but let the brokers themselves decide who they will accept (when via broker). Closed end funds and ETFs us aliens we aliens can ALWAYS buy (talking US broker) and hold.

Filled out a W-8BEN form being just my name and country. One page only. Super simple. Naturally Ameritrade know I am an Alien, and I have no SSI no. or similar. Had they thought I was a resident they would have to have SSI no as well as tax my butt off. Also have broker account in the US w. lowtrades.com. same principle.

Don't understand your "what ticker symbol works for you" ALL of them do via both my US brokers, my Luxembourg bank and my Scandinavien bank at home, as long as traded on the 3 major US exchanges.

Take care!
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peteyperson
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Post by peteyperson »

I've just been looking at a broker that is a joint partnership between TD Waterhouse and a Lux bank. First broker I've tried that can do quotes on UK stocks, US stocks and the EEM ETF too. Their portfolio page looks nice too, breaking out USD holdings, UK holdings, Canadian etc., only major market they don't cover is Japan it seems. E17 a trade.

http://www.internaxx.lu

Petey
ben wrote: I believe that the mutual fund companies can not sell directly to foreigners but let the brokers themselves decide who they will accept (when via broker). Closed end funds and ETFs us aliens we aliens can ALWAYS buy (talking US broker) and hold.

Filled out a W-8BEN form being just my name and country. One page only. Super simple. Naturally Ameritrade know I am an Alien, and I have no SSI no. or similar. Had they thought I was a resident they would have to have SSI no as well as tax my butt off. Also have broker account in the US w. lowtrades.com. same principle.

Don't understand your "what ticker symbol works for you" ALL of them do via both my US brokers, my Luxembourg bank and my Scandinavien bank at home, as long as traded on the 3 major US exchanges.

Take care!
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Post by Kramer »

Petey wrote:
I am interested to hear more on slice and dice of bond funds. Could you elaborate on that please


The idea is to expose your fixed income assets across different fixed income asset classes and risk factors (as opposed to investing in fixed income primarily for portfolio security). This would involve investments in High Yield Bonds, a range of maturities of ordinary bonds including long term bonds, foreign currency denominated bonds, and the ordinary stuff like treasuries (or UK equivalent) and high quality corporate bonds.

In the more traditional investing for security point of view, you would focus more on shorter maturity and safer bonds with less credit risk that are less correlated to stocks (in fact, short term bonds of duration 2 years or less have equity correlation of exactly 0).

Personally, I fall somewhere in between these extremes, although I probably lean more toward the safer, secure bond investing point of view. In America, for instance, we can buy treasuries direct for free (no diversifaction benefit from a fund because there is no credit risk). So when compared against an exotic asset class like foreign devleoped market bonds (expense ratio ~.55% for a cheap fund), it is tough to beat when you throw in the fact there is no state income tax on them if they are in a taxable account -- so when I retire (in a lower income tax bracket) I definitely plan to own some treasuries.


You should definitely want some of your portfolio invested in something other than pounds. A weak pound will cause inflation in the UK as imports go up in price and there is reduced competition for domestic products. However, you can get a lot of currency diversification through foreign equities.

You mentioned some load funds. I can't comment on what is available in the UK, but I would never ever pay a 5% load or high expenses. I would just avoid slicing and dicing altogether and stick to low cost, mainstream alternatives. IMO, the slicing and dicing benefit just isn't that overwhelming.

Have you indexed the EM over the past few years or actively managed? How have you done? My data here shows the past decade did nothing and only actively managed funds eeked out a return on investment.


Because of very high trading costs, EM passive equity has more advantage over EM active than almost any other asset class. Active EM funds come and go, any simple comparison is not fair, since fund houses incubate funds and make available the "successful" funds, that is, they started 3 funds in house, but only one makes it public or the other 2 go public for a while and then are quietly closed after bad performance while the successful fund is trumpeted as a big winner. This is called survivorship bias. I don't have cold, hard facts on this for EM handy, but Bernstein wrote an article about a year ago on the advantage of foreign indexing. Also, Vanguard's expense ratio is very low (.57%) for this class -- sorry that this is only available in American. The ETF will be available soon, but I am not sure about UK availability.

As to my own EM investments, I started investing there, unfortunately, around the peak, I think about late 1999. I have been dollar cost averaging ever since. According to my Vanguard cost basis number, I am up around 20% overall, probably more including dividends. It probably didn't hurt that I put a couple of nice chunks of money in there near the nadir this year. I had been waiting for Vanguard's EM ETF, finally decided it wasn't right around the corner, and just pulled the trigger. I have a large percentage of my portfolio in this asset class, 14% to be exact, and I will probably just not invest in it for a long time to get it down a few percentage points.

Anyway, Petey, I hope this helps. I enjoy reading your postings.

Kramer
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ben
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Post by ben »

Yes - internaxx.lu is on my radar too - reason is that it is some well established names, plus they are under Lux jurisdiction - a well established banking-haven.

You got the commissions slightly wrong - would be around EUR 28-35(up to Eur 10000 worth trade) per trade unless of course you want to become a frequent trader.
http://www.internaxx.lu/English/Prates.asp

Also you should note the Securities Custody fees - a typical European thing.... Oh; and the 2.5% loads on most mutual funds.

Another interesting broker, if one wants to trade many different markets (I don't - I simply use the USA based ETFs and closed-end funds to cover the world) is interactivebrokers.com - there rates are the cheapest one can find (starting at USD 1 for 100 shares in the USA!) but w. an additional subscription fee depending on what markets one want to follow. If it was me would simply subscribe to the US non-prof bundle giving me access to all USA markets - costing USD 10/mth - and free if use more than USD 30 in commissions in a given month.

To compare: IB: 12 trades a year of 50 IVV (SP500 ETF) is USD 120 in subscription fees+ USD 12 in commissions total USD 132/year. About the same costs as Ameritrade (10.99x12 = USD 132).

Internaxx: 12 trades of EUR 35 = USD 480/year + 0.05% of account value in custody fees (every year) being about USD 15 the first year(but growing fast). Total USD 500/year

Take care/
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peteyperson
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Post by peteyperson »

Hi Kramer,

Thank you for your considered reply and compliment about my posts. I'm not always sure they are that interesting as they come from a different perspective (it would be so much easier to be an American with the vast array of options).

I had been considering a mixed bond portfolio this week. At first I looked at holding several years in cash but when I found a fund that was relatively low cost 0.50% and held high grade short term bonds from well known large caps and HM Treasuries (we call them that too), it looked like a ' better than cash ' proposition. I have read quite a bit from Bogle and others about the risks with bonds regarding interest rate rises but short term bonds mitigate a lot of that risk. There are two UK ETFs now that are popular, one invests in all Corp Bonds in Europe (Euros) and the other top US$ Corp Debt (the latter not so attractive due to your base rate sitting at 1% and ours more like 4%). Both cost 0.20%, by far the lowest cost bonds available directly in the UK. A high yield bond fund is more like 1% and delivers 3% better return gross but how often do the high yield international bonds default and the difference need to be made up? I have no experience in them to know but Gillette Edmunds book commented that below an A is not worth the risk vs reward. I'm not sure about using a 5 year cash safety net in international currencies where they may be undervalued and not be 5 years worth at a crucial time when I need the money. It might however be okay to stick 40% in Euros to balance out the currency risks that you point out. If I do buy US, EM & some REITS directly from the US then I have 30%+ US$ exposure so I would probably choose Euro bond exposure over US$ to balance that out. I'd welcome your thoughts on this interesting balancing act!

I have been discussing with Ben the option to buy US ETFs and closed-end funds via an international broker. I have found at least one that can do that. This may open up the option to buy S&P spiders at 0.09% and ScV S&P/Barra splits in the US at least, at lower cost that I can buy the S&P500 here. The broker costs are high and it would need to be six monthly purchases rather than monthly investment which reduces my return a bit but I'm more looking at the costs during FIRE to stay in a low cost asset allocation over broker costs early on for individual long term investments that you buy in year 1 and don't sell for 20 or 30 years time. I think it will be a case of mixing and matching the investments to balance the risk that direct investment in US ETFs is banned later down the line (like how US movie studios put software on DVDs to try to stop them playing on international DVD players).

I had previously estimated a 7% gross return on equities with a 1.6% investment cost due to active investing to get small cap exposure, outperforming funds and in markets where indexing is not possible directly in the UK. I seemed happy to rachet up the investment costs but not happy to estimate a higher return from the high active investing costs in my calculation, which highlighted a difference in my logic & thinking. There is less risk and less possible downside from indexing large cap globally (via total market ETFs) and sticking with a safer 6.5% gross return estimate and 0.8% investment costs. You lose the potential outperformance but you would have to outperform by 2% annually to start to see any gain from the added risk of higher fees in good years & bad. I had considered this morning taking a 10-30% position in each market that is actively managed but again the numbers don't seem to make that worthwhile. It may come down to if I can invest in US ETFs directly via an offshore broker, then I'll slice and dice, otherwise index where possible. Accept the 50% in large cap equities with a lack of small cap exposure, and mitigate that with 30% real estate and 20% in fixed income.

Sorry, I'm talking out loud in msg form.

Petey
Kramer wrote: Petey wrote:
I am interested to hear more on slice and dice of bond funds. Could you elaborate on that please


The idea is to expose your fixed income assets across different fixed income asset classes and risk factors (as opposed to investing in fixed income primarily for portfolio security). This would involve investments in High Yield Bonds, a range of maturities of ordinary bonds including long term bonds, foreign currency denominated bonds, and the ordinary stuff like treasuries (or UK equivalent) and high quality corporate bonds.

In the more traditional investing for security point of view, you would focus more on shorter maturity and safer bonds with less credit risk that are less correlated to stocks (in fact, short term bonds of duration 2 years or less have equity correlation of exactly 0).

Personally, I fall somewhere in between these extremes, although I probably lean more toward the safer, secure bond investing point of view. In America, for instance, we can buy treasuries direct for free (no diversifaction benefit from a fund because there is no credit risk). So when compared against an exotic asset class like foreign devleoped market bonds (expense ratio ~.55% for a cheap fund), it is tough to beat when you throw in the fact there is no state income tax on them if they are in a taxable account -- so when I retire (in a lower income tax bracket) I definitely plan to own some treasuries.


You should definitely want some of your portfolio invested in something other than pounds. A weak pound will cause inflation in the UK as imports go up in price and there is reduced competition for domestic products. However, you can get a lot of currency diversification through foreign equities.

You mentioned some load funds. I can't comment on what is available in the UK, but I would never ever pay a 5% load or high expenses. I would just avoid slicing and dicing altogether and stick to low cost, mainstream alternatives. IMO, the slicing and dicing benefit just isn't that overwhelming.

Have you indexed the EM over the past few years or actively managed? How have you done? My data here shows the past decade did nothing and only actively managed funds eeked out a return on investment.


Because of very high trading costs, EM passive equity has more advantage over EM active than almost any other asset class. Active EM funds come and go, any simple comparison is not fair, since fund houses incubate funds and make available the "successful" funds, that is, they started 3 funds in house, but only one makes it public or the other 2 go public for a while and then are quietly closed after bad performance while the successful fund is trumpeted as a big winner. This is called survivorship bias. I don't have cold, hard facts on this for EM handy, but Bernstein wrote an article about a year ago on the advantage of foreign indexing. Also, Vanguard's expense ratio is very low (.57%) for this class -- sorry that this is only available in American. The ETF will be available soon, but I am not sure about UK availability.

As to my own EM investments, I started investing there, unfortunately, around the peak, I think about late 1999. I have been dollar cost averaging ever since. According to my Vanguard cost basis number, I am up around 20% overall, probably more including dividends. It probably didn't hurt that I put a couple of nice chunks of money in there near the nadir this year. I had been waiting for Vanguard's EM ETF, finally decided it wasn't right around the corner, and just pulled the trigger. I have a large percentage of my portfolio in this asset class, 14% to be exact, and I will probably just not invest in it for a long time to get it down a few percentage points.

Anyway, Petey, I hope this helps. I enjoy reading your postings.

Kramer
peteyperson
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Post by peteyperson »

Hi Ben,

Strangely I might be more keen on Ameritrade as I had previously heard of them, even though internaxx is part owned by WD Waterhouse #2 broker. I looked at Ameritrade, very much blocked site unless you sign up and could not find any info to suggest they do international customers and what they'll let you buy. In contrast, internaxx writes to that kind of customer and the quotes I did could get limited data on US, UK, you name it. Much more convincing. The internaxx fees look high but then I'm looking at the reduced costs thru lower ongoing investment mgmt costs once FIREd. High monthly custodial fees could be a problem though.

I would also possibly only buy every 3-6 months in order to reduce the number of transactions. Lowers the possible benefits of DCA. But it would bring the internaxx trading fees down, though would reduce my long term returns too with cash sitting aside that could be working for me. So its a bit of a toss up as we say in Britain.

P.S. I have no idea about Lux jurisdiction. That's another concern. At least an American company is likely to be able to be held accountable to some extent. I would need to investigate that more, right now it is an unknown quantity.

Petey
ben wrote: Yes - internaxx.lu is on my radar too - reason is that it is some well established names, plus they are under Lux jurisdiction - a well established banking-haven.

You got the commissions slightly wrong - would be around EUR 28-35(up to Eur 10000 worth trade) per trade unless of course you want to become a frequent trader.
http://www.internaxx.lu/English/Prates.asp

Also you should note the Securities Custody fees - a typical European thing.... Oh; and the 2.5% loads on most mutual funds.

Another interesting broker, if one wants to trade many different markets (I don't - I simply use the USA based ETFs and closed-end funds to cover the world) is interactivebrokers.com - there rates are the cheapest one can find (starting at USD 1 for 100 shares in the USA!) but w. an additional subscription fee depending on what markets one want to follow. If it was me would simply subscribe to the US non-prof bundle giving me access to all USA markets - costing USD 10/mth - and free if use more than USD 30 in commissions in a given month.

To compare: IB: 12 trades a year of 50 IVV (SP500 ETF) is USD 120 in subscription fees+ USD 12 in commissions total USD 132/year. About the same costs as Ameritrade (10.99x12 = USD 132).

Internaxx: 12 trades of EUR 35 = USD 480/year + 0.05% of account value in custody fees (every year) being about USD 15 the first year(but growing fast). Total USD 500/year

Take care/
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ben
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Post by ben »

Ameritrade lets you trade the US markets - I.e. all the US based ETFs - e.g. VTI (total stock market USA 0.15% e/r) and EFA (total internat. market 0.35% e/r. Then throw in some short bonds like SHY 0.15% e/r and some reits ICF around 0.35% e/r and one would have a well diversified and cheap portfolio - beating most the EU alternatives even with some wire fees thrown in.

Don't understand why in the world you think that USA ETFs and closed end funds would/could suddenly be illegal for foreigners to buy? They trade like stocks which anybody have access to. Hope you did not mix up with my comments on USA based MUTUAL funds - where the fund companies do not allow directly while some US brokers will let foreigners buy mutual funds. :D
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Post by peteyperson »

Hi Ben,
ben wrote: Ameritrade lets you trade the US markets - I.e. all the US based ETFs - e.g. VTI (total stock market USA 0.15% e/r) and EFA (total internat. market 0.35% e/r. Then throw in some short bonds like SHY 0.15% e/r and some reits ICF around 0.35% e/r and one would have a well diversified and cheap portfolio - beating most the EU alternatives even with some wire fees thrown in.

Don't understand why in the world you think that USA ETFs and closed end funds would/could suddenly be illegal for foreigners to buy? They trade like stocks which anybody have access to. Hope you did not mix up with my comments on USA based MUTUAL funds - where the fund companies do not allow directly while some US brokers will let foreigners buy mutual funds. :D


I make the comment because iShares UK ETF docs state that the ETFs are not for Americans because they are not regulated to sell them in the US, only certain countries like the UK. This is likely to apply to US ETFs for the same reason. Whether you can physically buy them via an international broker is another matter but it wouldn't change the issue of illegality or not designed or regulated for that purpose, possibly invalidating the purchase and needing the funds to be returned inc gains even if you've paid taxes on the gains already and don't have the money to give them. There is no telling what the end result would be if it was deemed wrong.

The other aspect is if you buy too much from the US side of things, not only do you expose a large part of your portfolio to a potential problem later, but you are heavily exposed to the US$ and currency risk if you invest in their currency and not your own. So that needs to be considered. Buying global market would be possible but the currency volatility might make it difficult to plan for FIRE later if the overall exposure is too high.

Those are the reasons.

BTW, could you just confirm how the Templeton EM funds, ticker TEI, charges the 1.15% E/R? Is it adjusted on the price monthly or a seperate charge or what? Ditto ETFs in general.

Thanks,
Petey
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Post by ben »

Never say never I guess... 8) Even Bernstein in is home page www.efficientfrontier.com (on of the many great articles called something with index funds vs ETFs) mentioned the great tool the US ETFs are for foreigners compared to our lackluster options at home - I even emailed with him following that, and confirmed to him that we aliens are very happy for those US ETF!

Also; if I invest in IEV (EU incl UK) my currency exposure is in Euro and Pounds (and some kroners etc.) - NOT in USD just because IEV is nominated in same - that goes for almost ALL index products. The variations in the underlying equities (bought in the foreign currencies) are affecting the price. I.e. if the EU market stays flat, but the EURO gets 2% stronger vs the USD, IEV will go UP 2 % (as based in USD).

Almost no index products are currency hedged.

There is also a US based ETF for UK only by the way. Underlying currency the pound naturally - so if pound gets 2% stronger and UK market drops 2% then fund flat measured in USD.

I.e. for all practical purposes the only currency risk is from you buy USD until you have purchased the foreign based index product.

The e/r (TEI 1.16% in latest prospectus) is deducted same way as in your UK mutual funds - you don't really see it - but its there! :wink: most ETFs normally deduct from the dividend if any prior payout I believe - but that is more of a practicality.
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Post by BenSolar »

peteyperson wrote:
I make the comment because iShares UK ETF docs state that the ETFs are not for Americans because they are not regulated to sell them in the US, only certain countries like the UK. This is likely to apply to US ETFs for the same reason. Whether you can physically buy them via an international broker is another matter but it wouldn't change the issue of illegality or not designed or regulated for that purpose, possibly invalidating the purchase


I think that this issue of 'not regulated to sell them' in such and such a place is an issue for a security to be listed in a given country or market. If you buy them through another market where they are properly listed, then there should be no issues of legality and no possiblility of them demanding that you liquidate them. For instance, it is fully legal and proper for me to buy stocks on the Oslo exchange in companies that are not listed in the US. They companies have not met the listing requirements to have an ADR listed here, but my ownership of the stocks is not in question if purchased through the exchange where they are listed.

Clear as mud? I'm not an expert on this stuff, but that is my understanding.
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Post by ben »

Solar; Yes, exactly my view/understanding too!

On a seperate side note; petey and I do not have exactly the same tax situation, as I am of Scandinavien nationality but based as an expatriate in Asia, while Petey is based in his home country - creating a slightly more complicated tax situation for him ( :() than me( :D).

The country I am based in (and taxed in) does not care about income from abroad, while UK/EU CERTAINLY have a different stance on that issue! So would think that he will have a bit more self reporting/calculations to do when using foreign based investment products, than when using UK based products - where probably most is auto-calculated (by UK broker or bank) and reported to tax authorities.
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Post by peteyperson »

Ben,

I would be interested to read what Bernstein has said about this issue. Do you have a link to the particular EF issue is was in?

Thanks,
Petey
ben wrote: Never say never I guess... 8) Even Bernstein in is home page www.efficientfrontier.com (on of the many great articles called something with index funds vs ETFs) mentioned the great tool the US ETFs are for foreigners compared to our lackluster options at home - I even emailed with him following that, and confirmed to him that we aliens are very happy for those US ETF!
Last edited by peteyperson on Thu Oct 02, 2003 1:00 pm, edited 1 time in total.
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Post by peteyperson »

Hi BenSolar,

Thank you for your comments below. It is good to get a second opinion on this issue as well. I am more reassured. I just don't want to be in a situation where 10 years down the line I have significant capital gains built-up in investments I didn't plan to touch for 20-25 years and be forced to sell them and lose the forward growth by deferred taxation.

I have done some sums and I think investing via the US in some things like REITS, US, Pacific and EM, I can boost my w/d rate by 0.50% to 0.75% which would be significant. I have yet to change my projections though as I want to have actually bought & owned the US ETFs before I'll assume everything is okay.

I am wondering about US REITs. Perhaps you can weigh in here. I had a plan to allocate 26% of the portfolio to two property mutual funds, 5% sales load and 1.76% mgmt fee. Est. 6.5% gross nominal return. I do wonder how realistic that is for the US and also that I'll have 26% REIT exposure in US$, 10% in US equities, some EM as well that can sometimes be linked to the US$ also. My total portfolio exposure to the US$ is likely to then be about 40%. I wonder whether a half & half UK expense property fund and cheaper US REIT ETF would be a better option despite the theoretically lower return.

Here's a fun one. US tax rules withhold 15% of the dividends. Investing in US REITS which payout almost all return as dividends mean that a 6.5% return via dividend costs 0.97% in taxes before my own taxes begin. This then adds to the 0.35% cost, bringing the net return down accordingly. If you consider the US tax withholding part of the expense ratio, it becomes 1.325% vs. a 5% sales load & 1.76% mgmt fees in the UK. The net difference would be a 0.11% bump in w/d rate exc the lost investment to sales loads. How do you feel about that sort of scenario if that was you?

Are there any US REIT ETFs you think are good? I would feel more comfortable buying them than a Vanguard fund via a broker just because I think the latter is more likely to get flagged up. There seem to be actively managed ones, a Wilshire index REIT and several others to choose from.

Thanks for your time.

Petey
BenSolar wrote: I think that this issue of 'not regulated to sell them' in such and such a place is an issue for a security to be listed in a given country or market. If you buy them through another market where they are properly listed, then there should be no issues of legality and no possiblility of them demanding that you liquidate them. For instance, it is fully legal and proper for me to buy stocks on the Oslo exchange in companies that are not listed in the US. They companies have not met the listing requirements to have an ADR listed here, but my ownership of the stocks is not in question if purchased through the exchange where they are listed.

Clear as mud? I'm not an expert on this stuff, but that is my understanding.
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