Investing in ETF’s

 

As mentioned before in the chapter on the core portfolio, ETF’s should be an important part of your core-portfolio. I explained the advantages of ETF’s before so now let’s see how you can get started.

What is important in your selection of ETF’s are the following elements:

• Costs: I explained before how important it is to limit the costs of the investment products you select so also in the selection of your ETF”s, you should keep an eye on the costs they charge you. Where to find this costs percentage? Well I usually look for the ETF on the website of Morningstar and at the right side of the chart is mentioned the cost they charge yearly. Example: the iShares Core MSCI World UCITS ETF USD (Acc) in euro charges 0.20% of its value as yearly costs. The iShares MSCI ACWI UCITS ETF USD (Acc), also in euro, will however charge you 0.60% as yearly costs. The advantage of this last ETF is that it includes shares from emerging markets, which the Core MSCI world ETF does not include. If you would want to buy an ETF that also covers shares from companies in emerging markets, (I would) you could, instead of buying the second ETF, which charges 3 times higher costs, buy some parts of the cheaper Core MSCI World ETF and supplement this with some parts of the iShares MSCI EM UCITS ETF USD (Acc), also in euro and which only charges 0.18% in yearly costs.Or you could buy the Vanguard FTSE All-World UCITS ETF USD Acc. in euro that also includes emerging markets. 

 

• UCITS: For most ETF’s you may consider buying, you will find the letters UCITS in the title. This means that the ETF conforms to European Union regulations designed to protect the investors from unsuitable investment vehicles. It would lead us too far to detail which requirements need to be met in order to qualify but generally it is a good idea to favor ETF’s that carry this qualification. In any case, if you are an investor based in Europe, your broker will not authorize you to buy most ETF’s based in the US as these ETF’s do no fulfill all conditions laid down in PRIIPs – a set of EU investment regulations designed to protect consumers (PRIIPs stands for Packaged Retail Investment and Insurance Products).
  PRIIPs require fund providers (including ETFs) to produce a Key Information Document (KID) that enables investors to compare the risks, rewards and costs of different investment products.

 

• Country where the ETF is based: Go for ETF’s based in Ireland. Irish ETFs can benefit from the US/Ireland double tax treaty, which reduces standard withholding tax rates from 30% to zero on US-source interest and 15% on US-source dividends. How to recognize an ETF based in Ireland: Every ETF has a unique ISIN code. (so do shares and publicly traded bonds and investment funds) The ISIN code of ETF’s based in Ireland starts with the digits IE. Again, the ISIN code of any ETF is to be found on the website of Morningstar. But, do not worry, the vast majority of ETF’s are based in Ireland. If an ETF based in Ireland is not available look for an ETF of which the ISIN code starts with LU. It is based in Luxemburg and ,as with Irish ETF's, you will avoid double taxes on dividends in distribution versions. Dividend from ETF's based in Germany and France will be taxed twice. Take care, the country where an ETF is based is not linked to the stock market on which the ETF can be bought. We buy most ETF’s on the Amsterdam, Frankfurt, Milan or London stock markets. An Irish or Luxemburg based ETF can perfectly be bought on the Amsterdam, Frankfurt or Milan stock exchange.

 

• Accumulation versus distribution. Accumulation means the ETF does not pay a dividend. Profits and dividends from the underlying shares or bonds are added to the value of the ETF. A distribution ETF does pay a regular dividend. Depends on the tax system of the country you live in, accumulation is usually more advantageous when you hold on to the ETF for several years as your profits grow without taxes on the dividends being deducted. In Belgium for example there is no tax on capital gains so for ETF’sexclusively invested in shares, it is, for the time being, more beneficial to go for accumulation ETF’s. For bond ETF’s, in Belgium, the advantage is less outspoken and you could opt for distribution ETF’s. Some people prefer a regular income from their portfolio in order to supplement their pension or other revenue and therefore opt for distribution ETF’s. Although nothing stops you from regularly selling some accumulation ETF’s when you require some extra cash.         If you are a Belgian citizen and tax-payer a word of warning.    Bare with us, it is going to get a bit complicated. The Belgian tax rules on ETF's are kafkaesque. On some capitalzation ETF's (ETF's not paying a dividend) you will pay 1.32% tax at purchase AND at sale. On others only 0.12%. So BEFORE hitting the buy button on your broker's website always verify how much taxes your broker will charge you. Some brokers, such as Saxobank, do not include the tax you are going to pay on the buy order overview you get BEFORE you hit the buy button. In this case, before starting to create the order, you have to check on the page of the product on their website under the "i" button, top right on your screen how much tax they will charge you; 0.12% or 1.32%. If it is 1.32%, look for an alternative or opt for the distributon version. Most of the times you will find one. To make things even more complicated, not all brokers interpret the legislation in the same manner. We saw examples of ETF's for which one broker charges 1.32% and another 0.12%.  In the distribution version a 30% tax will be charged on the dividends but you will avoid paying 1.32% tax on purchase AND on sale and you will benefit from a regular revenue from your ETF with which to do some fun things in life. We see a mounting pressure in Belgium, from the side of policy makers, to charge 1.32% tax on capitalisation ETF's,  so we increasingly opt for distribution versions. You should be able to buy all the ETF's, in the example portfolio herunder, at 0.12% tax in Belgium but please verify before each purchase.

 

•  Which ETF’s to choose? You can make your ETF portfolio as elaborate as you wish. I know investors who limit themselves to buying every month some shares of the worldwide Vanguard FTSE All-World UCITS ETF. No hassle, minimal costs, no need to read any investment magazines and take difficult decisions. Every month you put 1 purchase order on your brokers’ website. It takes you 2 minutes and then you are off for a walk in the woods. You invest in a portfolio of worldwide companies, so it is a defendable strategy. But I would advise against it. Putting all your eggs in one basket is never a good idea. You can of course, put some extra accents in your portfolio, for example because you do not like that the general worldwide ETF’s invest for around 50 to 60 % in the US and relatively limited amounts in emerging markets. Also the worldwide ETF’s are often dominated by the big US tech shares which are now, after the corona crisis, pretty expensive. (In part due to the buying spree in ETF's)  You could want to invest a bit more in value shares (companies that have relatively cheap valuations relative to their earnings and long-term growth potential) or quality shares (quality is a difficult concept based on profitability; such as gross margins, return on equity, return on invested capital etc.)   Also, maybe because you approach pension age, you may want to protect your portfolio somewhat against an eventual future bear market  and you may want to, regularly, withdraw some money from your portfolio. In order to avoid having to sell ETF’s, at bargain prices in a bear market, you could favor ETF’s that invest in, less volatile, solid dividend payers or bonds.

 

• So you can personalize your ETF portfolio and put your own accents. Hereunder is an example of an ETF portfolio, with some personal accents, but this is merely an example and you can of course put your own accents. As a rule, the more “specialized” the ETF will be, the higher the costs, because some opportunity decisions will need to be made by a management team. For example, the Vanguard FTSE All-World UCITS ETF has a yearly cost of 0.22% but the EMQQ Emerging Markets Internet & Ecommerce UCITS ETF comes at a yearly cost of 0.86%. Needless to say that the last ETF made a killing during the corona crisis and has risen by around 58% in 2020.   Be aware that by putting accents, you are making opportunity decisions and whilst doing so you can be right but you can also be wrong in your decisions so, I would say, do not overdo it by only buying specific “accent” or "factor" ETF’s. It is almost impossible to outguess the market with respect to which factors will outperform and for how long they will do so. Research has demonstrated that the most effective accents, which are most likely to give you a long term benefit are:” Value”, “Quality” and “Small-cap”.  “Low-volatility” and “Momentum” would rather lead, long term, to an under-performance.

 

Conclusion: ETF’s are an essential part of your core portfolio and a low-cost and hassle-free way to invest in a diversified portfolio but please read also my growing reserves on investing in the most popular ETF's in my page on "Core-portfolio. As opposed to other advisors and web-sites, I advise against a portfolio that is limited to only investing in the major, popular ETF's. You need exposure to different asset classes. So I would not limit myself to only buying ETF's that invest in the MSCI world or other major indexes where US tech shares are dominant. Tide could turn against them in the future and after years of out-performance they could well correct and under-perform in the coming years. The opposite is also true. I would not build a portfolio only by specialised ETF's, excluding the larger "World" ETF's. The disadvantages of stock-picking will start to play and you will probably under-perform the world markets.

 

Example of an ETF portfolio with some conviction accents:

 

SPDR MSCI ACWI:                                                                 18%    (or Vanguard FTSE All world VWRL for dividend lovers)

 

iShares Core MSCI Emerging Markets IEMM  :                        6%

 

SPDR MSCI Emerging Markets Small Cap EMSD:                  5%

 

Vanguard EUR Corporate Bond VECP:                                     8%

 

Wisdom Tree Global Quality Dividend Growth  GGRA              11%

 

iShares MSCI World Small Cap  IUSN:                                       4%

 

SPDR MSCI World Value WVAL:                                                5%

 

WisdomTree Europe SmallCap Dividend DFEE:                        5%

 

VanEck Vectors Morningstar Global Wide moat VVGM:            6%

 

VanEck Vectors Gold Miners G2X:                                              8%

 

VanEck Vectors Junior Gold Miners G2XJ                                   4%

 

iShares Edge MSCI EM Value Factor EMVL:                               4%

 

VanEck Vectors Global Mining  WMIN                                           4%

 

iShares Oil&Gas exploration & Production SPOG                          5%

 

Global X Copper Miners  COPX                                                      4%

 

Sprott Uranium miners U308                                                           3%

 

 

This ETF example portfolio holds a larger number of positions. This is of course not a feasable diversification for smaller portfolios but we wanted to include a larger number of ETF's, we currently find interesting. Up to investors to make their own choices.

 

Again, this portfolio is merely an example. More examples can be found on the following websites:

 

portfoliocharts.com 

or

geldreview.nl/beleggen/beleggingsportefeuille-voorbeelden

 

We also particularly like the articles on ETF investing on the websites:  Financelle.nl and on Spaarvarkens.be