In this post, I will explain the reasons, advantages, and dynamics of the investment in ETFs abroad and I will also explain the basic motivation of each one, be it a tax, tax, financial, monetary.
It’s a great post, but it’s very educational and can change the way you look at investments, read it calmly, think about it, read the sources, read the book I’m going to indicate.
Firstly, AGAIN, I will indicate the book for the THIRD TIME. Soft water in hard stone both beats until it sticks.
The CORE book for you to learn how to invest abroad is this:
It is impossible to talk about investments abroad and in ETFs without mentioning John Bogle, Vanguard and iShares. These 3 book plates are the mantra and the base:
1 – KEEP COSTS LOW (low fee rates ETF)
2 – Keep things SIMPLE (small wallet, just wrap your head)
3 – Stay the course (following the ITS plan), stop turning, in and out, change Very plans, sell assets, get everything, and worry about newspapers, magazines, blogs and etc …)
But Frugal, who is this JOHN BOGLE? What did he do? Why it is SO IMPORTANT.
Well, John, he’s the founder of Vanguard. Vanguard is a gigantic and powerful company that manages ETF funds, also serves as a stock broker and also creates and sells its famous ETFs such as VOO, VTI, VT and VGLT among hundreds. Needless to say, old John is hated by many fund managers and finance professionals because he has placed ANYTHING a TRILHIONARY industry at risk and in check.
If you really want to understand what I’m talking about, it gives a lot of calm in this study:
What is Vanguard’s differential?
Vanguard has existed for more than 30 years since the 1970s. It invests in PASSIVE investment in index funds at a low cost (it is non-profit for what it seems) and thus manages to leave an admission rate of ETFs As low as 0.05% pa To judge the whole thing you have to see the context of the time where THOUSANDS of fund managers make many peripécias, give a FUCK, CAN NOT “beat the market”, charge ABSURD RATES like 1% , 1.5% and 2% pa and thus drain the resources of the fund’s quota holders and become all billionaires. Finding a Warren Buffet or a Peter Lynch to manage YOUR MONEY is a VERY, VERY RARE thing.
So I’ll give you a brief summary:
Did you think of ETFs abroad? VANGUARD or iSHARES (preferably in IRELAND)
investment philosophy for the COMMON PEOPLE (YOU AND I) – ETFs passive indices. (They are well diversified, has a consistent investment style, has a double tax advantage [low turnover of shares and IR])
Brazilians wanting to invest abroad? Open an account with Interactive Brokers or another GLOBAL broker (such as Saxo Bank) to give you access to the UK market. The IB has VERY GOOD rates.
Brazilians with a brokerage account that operates only in the US? ETFs from Vanguard.
On the outside, there is a VERY LARGE discussion between investing in passive ETFs OR setting up your individual stock portfolio and going to study and adding companies. Those are the two main strategies, each one upholds, I’ll talk a bit about the portfolio of individual global companies. (Remember that this discussion is from Americans with the US – growth dividend portfolios vs. index ETF portfolios) and YOU ARE NOT AMERICAN.
Thanks to a comment to a link that the friend The Aporter sent me (worth the Aporter) I arrived in a page of Bogleheads that is this:
Look at the passage I took from there:
WHY INVEST IN IRELAND-DOMICILED ETFS AS AN NRA?
A few reasons for preferring Ireland-domiciled ETFs over US-domiciled ETFs:
- Ireland-domiciled ETFs can benefit from the US-Ireland tax treaty rate of 15% on dividends and 0% on interest paid to Irish corporations,  instead of 30% for non-treaty NRAs.
- Double tax withholding for US-domiciled ETFs holding foreign securities. The US-domiciled ETF pays to withhold to international governments, then the US levies 30% off of the remaining distributed dividends.
- Complex and Constantly changing US tax laws Affecting NRAs. Leave it to iShares and Vanguard Dublin to deal with those.
- Non-residents are not liable to Irish gift tax or inheritance tax.  
- Availability of accumulating funds.We, NRA DO NOT PAY SUCCESSION TAX if we invest in ETFs based in Ireland. Excellent positive point. Investing in the US gets 40% tax.Source 2 and 3 is this reference to inheritance tax or even donation (I imagine you can give these actions to a child) are here:
Download and save the PDF.
Taxation and inheritance Ireland
Another more complete guide to Irish funds you can find here:
Riding your wallet:
Study companies, read releases, make predictions, have a little luck, diversify very, very even (I would say that having less than 50 companies abroad is little), TO PAY 30% tax on dividends , and finally monitor and stay Always in mind with this portfolio (outside your wallet in Brazil, your real estate funds, your fixed income and other things in life, many, many hours of your life ‘invaluable’ hours managing your portfolio) – what’s the value of that? It’s less time with family, having fun, sleeping, or watching the movie or at the gym. The concern here is the key word. Keeping things simple for living happily investing means LOW CONCERN.
Look, as an NRA (nonresident alien) we Brazilians get into the biggest TAX RATE in the US, that’s it, Uncle Sam is fucking you, decorate that acronym NRA that is you. Note that the average AMERICAN, DOES NOT PAY 30% of IR with the proceeds, this will depend on the bracket he enters in the tax, the bracket is like the set of people who have that income, some Americans only pay 15% of IR in this tax if they enter a low bracket. Remember that this is not 5 years from now, but an ENTIRE life of investments taking this sinister BITE of the American lion.
You BRAZILIAN NRA, remember one thing, when buying an asset, whether ETF or stock (or REIT) abroad:
HOW HIGHER YIELD, WORST FOR YOU!
HOW HIGHER, WORST FOR YOU!
HOW HIGHER YIELD, WORST FOR YOU!
Imagine when you have $ 1 million in your US portfolio and get a yield of 3% per annum adding up all your individual shares, you would give $ 30,000 a year GROSS, you would pay 30% of IR on it, or $ 9 thousand dollars straight from the pocket of the American politicians, from YOUR money. And remember that UNTIL YOU ARRIVE in this MILLION, you paid MUCH, but MUCH more tax for them, which made your stock portfolio grow WELL MORE DEVAGAR. If you want to buy individual stocks, prefer those that pay low or zero yield.
NOTICE TO THE BASTTERIANS:
I admire the work of Bastter, I admire his person and his philosophy and etc … if he applies the concepts in Brazil, he has a scholarship with only 300 companies and with very good faith only about 40 good companies to become a partner. I understand all the arguments AGAINST ETFs, I am an old user of the Bastter site.
There’s a lot of junk in ETF? Has.
Do you have BAD and indebted company? HAS.
ETF in Brazil? I do not recommend any except the IVVB11 for those who can not invest outside by brokerage abroad.
But when you go to the US where you have more than 10,000 listed companies, hundreds of ETFs, FIVE IPOS on average per WEEK, etc … the thing changes a lot of figures. If you have read my previous posts, you know that Brazil only represents 3% of the world economy, that is, it is a tiny market (and the tiniest more VOLATILE), even more depending on commodities and the goodwill of the government do not STEAL SO MUCH.
Can you be happy and successful by buying a good company and managing your wallet out there? YES. The point here is not the one. It is perfectly possible to be happy, wealthy and have a basic and profitable portfolio out there, but this will have a huge cost of study hours and a lot of worry in your head. I do not have ANYTHING AGAINST who wants to invest like this after all your money and availability are yours, and honestly, I TRY TOO MUCH that you are SUCCESSFUL whatever strategy to use.
Understand one thing:
When you set out to set up and manage your stock portfolio abroad, you, perhaps just maybe, are assuming that you will “hit the market” with your wallet, which will WIN the market even with this HORRIBLE, Choose WINNING COMPANIES in the long run amid thousands (the famous stock picking). That means you have to be really good at it (better than 96% of professional managers) or you like it and do it for hobby or passion, but that’s fine. I do not condemn you and maybe it’s not just that, everyone has their reasons
I will now speak of what I want and not what I do not want.
FIRST THING YOU HAVE TO WORRY? TAX!
Look at this picture I took from the book I quoted, save it:
Remember one thing: you are not Americans. Many things they buy as dividend payer and REITS they put into 401k and Roth IRA accounts that are special tax treatment for retirement purposes, we Brazilians DO NOT HAVE how to have those accounts from here, you need to have an SSN (Social Security Number) to open them.
Notice that High yield bond funds and REITS have a DEVASTATING effect on the construction of their equity (some REITS pay 4.5% yield per year, which is horrible for us). At the other end are passive ETFs and the tax-managed stock funds (also available on vanguard). You have to understand how the taxation of assets abroad works for us Brazilians and learn to protect themselves from paying too much tax in this dynamic.
Vanguard ETFs. ETFs ishares (UK preference). Lowest yield possible. Lowest taxation possible. Greater diversification possible.
Why ETFs in UK (UK)?
I’ve explained it here in other posts, but if you fell right here on the parachute there goes:
The ETFs based in Ireland have tax treaties with the US and are only taxed at 15%, plus some of them DO NOT PAY DIVIDENDS (the ones we NRA must choose).
Ahahh, but that’s not funny! DOES NOT YOU PAY DIVIDENDS? Why would I invest in it?
Guys, the more you RECEIVE money, the more you will lose money via taxes. What matters is to accumulate and watch the cake grow. IF YOU NEED MONEY FROM Overseas Assets you can sell up to 35,000 REAIS monthly and WILL NOT PAY NO TAX on capital gain on this. TAKING this dividend thing from the head, receiving dividends as an NRA is extremely prejudicial, EXTREMELY, in shaping your wealth and your assets.
I could simulate various things with dividends or not, but I will not do it, I will leave it to those who know, and you should know to do a simulated study with these two alternatives and in equal returns, or even with a better return on the stock portfolio (Which I think is very unlikely) and see that even then it will be very difficult to do that.
To complement and close the post I will leave this link of this article and I will highlight an already well-known part (and hated by Wall Street):
Professionals Can not Pick Winners
The New York Times article, “The Prescient are Few” ( 1 ) offers a great look at the study ( 2 ) by Professors Laurent Barras, Olivier Scaillet and Russell Wermers about the performance of 2,076 professional mutual fund managers over a 32-year team Period.
The result is what I’d expect. They found that from 1975 to 2006, 99.4% of mutual fund managers displayed no evidence of genuine stock picking skill, and the 0.6% of managers who did outperform the index were “statistically indistinguishable from zero.”
Professor Wermers goes on, “This does not mean that mutual funds have beaten the market in recent years. Some have done so over a period of two or three years. But the number of funds that have beaten the market over their entire histories is so small that we can not eliminate the possibility that the few were merely false positives ”
In other words, they got lucky.
And he finishes with some sage advice:
“Until now, I would not have tried to discourage a sophisticated investor from trying to pick a mutual fund that would outperform the market. Now, it seems almost hopeless. “
I ndividuals Am Even Worse
Professors Brad Barber and Terrance Odean have done excellent work on this topic. In Their paper, “The Behavior of Individual Investors” ( 3 ) They review and summarize the vast amount of research on the stock trading behavior of individual investors. Their findings are remarkable:
- Underperform standard benchmarks (eg, a low cost index fund)
- Selling winning investments while holding down investments (the “disposition effect”)
- Are heavily influenced by limited attention and past performance in their purchase decisions
- Engage in naïve reinforcement learning by repeating past behaviors that coincided with pleasure while avoiding past behaviors that generated pain
- Tend to hold undiversified stock portfolios
They Redbourn another stab at it with excellent research paper titled “Trading Is Hazardous to Your Wealth:. The Common Stock Investment Performance of Individual Investors” ( 4 )
Individual investors who hold common stocks directly pay a tremendous performance penalty for active trading. Of 66,465 households with accounts at a large discount broker during 1991 to 1996, those that traded most earned an annual return of 11.4 percent, while the market returned 17.9 percent. Overconfidence can explain high trading levels and the poor performance of individual investors. Our central message is that trading is hazardous to your wealth.
And now imagine YOU, a poor NRA living in Brazil paying the 30% of IR income to the American lion, leaving with a higher equity than investing in an index fund, taking that portfolio of more than 50 shares in the back for more than 30 years?
Seriously, by the studies presented the odds are VERY SMALL.
Investors in individual stocks are losing a lot, a lot of money in following this strategy, this in the US, imagines here in Brazil for us poor NRA.
From 1975 to 2016, in more than 2,000 funds studied, only a few (6%) hit the market for more than 30 years consistently. And this funds managed by professionals who dedicate life to this.
That is, people, the message of this post here is this:
Being an NRA is something terrible, but workable.
Taxes drain your equity.
Dividends abroad undermine your equity.
Stock picking, in the long run, will consume you and worry you and most likely you will have had three decades of unsuccessful work (the value of your wallet will be far less than the value of your portfolio investing in passive ETFs).
Diversifying with ETFs with a more friendly tax structure is much more advantageous for us Brazilians.
Know that you are ignorant.
Learn about Vanguard and iShares.
You have to invest to live and not live to invest.
I suggest you read the book I quoted at the beginning of the post and if you prefer read the books that John Bogle himself wrote (before he started investing abroad)
The subject does not end in this post. I have noticed MANY people VERY interested in investing abroad with this passive investment strategy and that is great.