# Investing in a USA Index fund



## anasttin (3 October 2016)

Hi,

I'm considering investing in a USA index fund as a long term investment and would like to ask a few questions.

1) I believe that I will have normal foreign exchange exposure on the funds and will have to pay Australian income tax on any profits on the investment, but are there any other ways that my investment would differ from an investment made by a resident of the USA (assuming of course, that there are no hurdles stopping me from investing in the US stock market in the first place)?

2) I'm after opinions on if its a good idea or if I should find a low fee charging Australian Share Market Index fund.

3) Can anyone recommend an Australian Share Market Index fund that has a low fee structure and reasonable performance in the long term.

Many thanks for your time,

Ana


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## peter2 (3 October 2016)

It's worth considering the ASX listed exchange traded funds (ETFs) that cover the market that you want to invest in.

ETFs that cover the US market are supplied by iShares, Betashares and Vangard. Some of these ETFs are hedged against the USD some are not. Some use leverage, some do not.


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## anasttin (3 October 2016)

peter2 said:


> It's worth considering the ASX listed exchange traded funds (ETFs) that cover the market that you want to invest in.
> 
> ETFs that cover the US market are supplied by iShares, Betashares and Vangard. Some of these ETFs are hedged against the USD some are not. Some use leverage, some do not.




===============

Thanks Peter.  I wasn't sure anyone would reply so I really appreciate your time.

What I'm thinking about is taking some advice that Warren Buffet suggested - specifically "to allocate 90 percent of your money to the Vanguard S&P 500 ETF (VOO) and 10 percent to the iShares 1-3 Year Treasury Bond ETF (SHY). 

Do you think that that is good advice for us Aussies? Or only USA residents?

Obviously just after an opinion.

Thanks again,

Ana


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## peter2 (3 October 2016)

The ETFs you mention are listed in the US market. Easy for US residents not so easy for Aust residents. Aussies should look at the ASX listed ETFs. 

I don't want to comment on the mix as the most appropriate mix will depend on individual circumstances (age, years to retirement, other assets etc. )

A passive investment approach using ETFs (ie buy and hold) is suitable for those who aren't interested in actively managing these investments. A passive approach will do better than a poor active approach. Most people who think they can actively manage their "investments" can't and would be much better off with a long term passive approach.


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## anasttin (4 October 2016)

You're awesome Peter. I really appreciate your advice.

Can I ask why its difficult for Aussies? I'm definitely interested in a long term passive approach but noticed that the cheapest Australian ETF appears to be Vanguard Australian Shares Index (VAS) which is 3 times the cost of the Vanguard US Total Market Shares Index (VTS) - not that I know about their long term performance.

What would you recommend for a long term, passive investment with good long term performance net of fees?

Many thanks again,

Ana





peter2 said:


> The ETFs you mention are listed in the US market. Easy for US residents not so easy for Aust residents. Aussies should look at the ASX listed ETFs.
> 
> I don't want to comment on the mix as the most appropriate mix will depend on individual circumstances (age, years to retirement, other assets etc. )
> 
> A passive investment approach using ETFs (ie buy and hold) is suitable for those who aren't interested in actively managing these investments. A passive approach will do better than a poor active approach. Most people who think they can actively manage their "investments" can't and would be much better off with a long term passive approach.


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## peter2 (4 October 2016)

The difficulties I mention are involved with finding a broker who will deal in US ETFs easily and cheaply. Aussie brokers will charge an arm and a leg. US brokers are much cheaper but they use holding companies that hold your investments for you (supposedly). You will probably hold your investment longer than the broker will remain in business. Our Aussie CHESS system seems more reliable long term. 

I am more wary of broker risk than most as I've seen too many brokers go bad. 

Management fees are important over the long term. Brokerage costs are not so much of a concern unless you plan to add to your initial investment frequently and I think you should (2 - 4 times/yr). Most of the index ETFs pay dividends which should be reinvested along with any extra you can afford. After 10 - 15 years the compounding gets impressive (really awesome).

Luckily I'm not allowed to recommend anything specific, phew!  I think you will do well if you remain invested and accumulate a few (not too many) Aussie and US index based ETFs over the long term (>10yrs). 

Performance: Most of the ETFs that we've mentioned do a good job of sticking to their benchmarks. However over time (years) they slowly drift lower due to the accumulated impact of those pesky management fees. Don't let this put you off this idea as the real impediment to seeing the impressive compounding at work is us. Good luck.


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## McLovin (4 October 2016)

Watch out for estate taxes as a non-resident investing in USA domiciled funds. They can really destroy decades of work. I think it's 40% with no threshold. There was some discussion about this last year, but I can't find the thread.


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## craft (4 October 2016)

anasttin said:


> Hi,
> 
> I'm considering investing in a USA index fund as a long term investment and would like to ask a few questions.
> 
> ...






anasttin said:


> ===============
> 
> Thanks Peter.  I wasn't sure anyone would reply so I really appreciate your time.
> 
> ...




As a rule passive is the best way to go unless you are 'truly' the exception to the rule. If you are the exception you would know both the pro's and cons of the topic inside out.

To be truly passive you probably want: As broad diversification as possible to negate selection risk;consistently average in and out to eliminate timing risk; As low cost as practicable. Hedging is interesting - I would say unhedged unless you have a long term 'profitable' insight on country economics (which by definition is not a passive stance).

As for Buffett: I wouldn't take him too literal - I suggest the reason he suggested US shares is because that is where he lives and consumes and what he understands. I wouldn't think he is saying Actively select US Shares over another roughly equivalent well governed country.

I also don't think there is any thing magic about the 90/10 split. I read it more as him implying the majority of investments should be productive business assets with a liquidity cushion for near/medium term spending needs.

To me it makes sense to have a decent swag of any indexing in the broadest exposure to the index of the country where you will spend the majority of your life and resources. Its a natural hedge.  Beyond that I think go world index its a s broad as you can get which gives the greatest diversity for a true passive perspective.

Because of possible foreign jurisdiction legislation changes and tax implications I personally have a preference for Australian Domiciled ETF's. They are dearer but we are not talking big bucks ~$100p.a for each 100K invested and risk weighted I think its money well spent, particularly in regards to possible difficulties around claiming back withholding tax in a zero taxed SMSF environment and possible estate tax implications.  VAS for Australian exposure has a MER of 0.14. VGS for world ex Aus has a MER 0.18

VTS is a Chess Depository Interest and the holding Nominee company is CHESS Depositary Nominees Pty Limited so they don't have the problems Peter eluded to in relation to broker holding when buying oversees ETFs which I would also steer away from but the domicile is still worth considering. If the domicile doesn't worry you they can be brought and sold exactly the same as any Aus listed ETF or stock.


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## So_Cynical (4 October 2016)

anasttin said:


> Hi,
> 
> I'm considering investing in a USA index fund as a long term investment and would like to ask a few questions.
> 
> 1) I believe that I will have normal foreign exchange exposure on the funds and will have to pay Australian income tax on any profits on the investment, but are there any other ways that my investment would differ from an investment made by a resident of the USA (assuming of course, that there are no hurdles stopping me from investing in the US stock market in the first place)?




Vanguard U.S. Total Market Shares Index ETF (VTS)

https://www.vanguardinvestments.com.au/retail/jsp/investments/etf?portId=0970##overview-tab


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## anasttin (5 October 2016)

Guys (particularly Peter2 and Craft) - I just have to say a very big thanks for giving me such considered and helpful responses.

I'll mull over your thoughts (which are all very logical and reasonable) over the next week or so and post here again with what I'm thinking of doing.

Again, many, many thanks as I find it quite scary delving into an area I don't know much about and your advice has been amazing to get.

Take care,

Ana


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## skyQuake (5 October 2016)

For some more details check out 

https://www.stockspot.com.au/static/reports/Stockspot-ETF-Report-2016.pdf

They also run some ETF aggregation and provide a bit more range than your standard WRAP platform but charge a small fee


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## anasttin (10 October 2016)

Hi guys and thanks again,

As promised, I'm just posting what I plan to do on the investment front.

Based in large part on the advice you all gave (thankyou again!), I've decided to put $1000 into VAS (Vanguard ETF shares) and $1000 into VAP (Vanguard ETF property) for one year to make sure everything is as I expect.  If all is okay, I'll put in another $5000 in each after that, adding more bi-yearly when I can over the following 10 years + to retirement.

I do have one more question on this... how do I actually do this investment?  

Thanks so much.

Ana


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## Habakkuk (10 October 2016)

Ana, have you really thought this through? Brokerage will take a big bite out of such a small investment, like 1.5% on $1000 ($14.95 at Nabtrade). Compare that to the MER of 0.14% or something? Now you can justify this and say you pay brokerage only once, and over 10 years + to retirement it's really only 0.1%, or whatever you need to convince yourself.

I'm not contradicting the other advice but did you notice the assumptions?



> MER ... we are not talking big bucks ~$100p.a for each 100K invested and risk weighted I think its money well spent






> Brokerage costs are not so much of a concern unless you plan to add to your initial investment frequently and I think you should (2 - 4 times/yr)




They didn't have all the information required *in my opinion*.


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## anasttin (10 October 2016)

Thanks for your concern Habakkuk.  I really appreciate the time you took to respond.

To give you more of the back story... I dabbled in buying specific shares about 15 years ago and lost enough money to be scared out of the market ever since.

Now I find that the money I've been saving has added up and is not working for me in the bank where I'm getting only 3.75%

I guess what you're witnessing is someone dipping their toe in the water to restore their confidence.

My first question is...What would you recommend I do, having lost all confidence in specific shares and wanting a passive approach to earn the best net-of-expenses return I can get over the long term?

Note that the $5K I mentioned would be year 2 and year 3 and beyond would go up to $20K each in VAS and VAP as my confidence grew.

My second question is... How do I actually invest in these ETF's if it is the best option?

Many thanks Habakkuk.

Ana
------------------------------------




Habakkuk said:


> Ana, have you really thought this through? Brokerage will take a big bite out of such a small investment, like 1.5% on $1000 ($14.95 at Nabtrade). Compare that to the MER of 0.14% or something? Now you can justify this and say you pay brokerage only once, and over 10 years + to retirement it's really only 0.1%, or whatever you need to convince yourself.
> 
> I'm not contradicting the other advice but did you notice the assumptions?
> 
> ...


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## Habakkuk (10 October 2016)

Ana, the advice you have been getting is perfectly reasonable in a general sense. But you're not 'general'. You are 'specific'.
What prompted me to respond was that your objectives and your situation were not taken into account.

That's what financial planners are supposed to do. I'm not suggesting you go down that path. On the contrary, it would be better to become sufficiently knowledgeable to make your own decisions. Most people never get to that point. For them investing in an Index ETF may be the best alternative.

If you're getting 3.75% on your term deposit, you're doing OK for the moment. The return from shares has been higher than that, as you would expect, but that's in hindsight.
In my opinion you would be better off sticking to term deposits with such small amounts to invest. But if you must, choose just one ETF so that you pay one lot of brokerage.

Your next question is "which broker?". If you happen to bank with NAB, then nabtrade is the way to go. If it's ANZ, CBA or WBC, they are more expensive. I would avoid them (although I use Westpac Broking myself). Other brokers may be cheaper, like $10 brokerage but make sure you understand the terms and conditions, e.g. any other fees involved, and who owns the shares.

Your comment "... as my confidence grew" is slightly puzzling. Do you mean confidence in yourself? Confidence in Vanguard? Confidence in the concept of ETFs?

So many questions and I have no answers ...


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## anasttin (10 October 2016)

Hi Habakkuk,

Again, thanks so much for your help and advice.

I think that 3.75% barely keeps me ahead of inflation which is why I'm looking for something better that I can set and forget.  I think VAS has been consistently around the 9% point (net of fees) and VAP much better, but more targeted.

To your questions..."Do you mean confidence in yourself? Confidence in Vanguard? Confidence in the concept of ETFs?"... I answer, all of the above.

I actually bank with Bank Of Melbourne.

I take it you're saying that I just sign up somewhere for an online share trading account that charges no more than $10 per trade and buy the VAS shares myself rather than going through a broker (I haven't looked at this sort of stuff for over a decade and can't remember).

Thanks again,

Ana



Habakkuk said:


> Ana, the advice you have been getting is perfectly reasonable in a general sense. But you're not 'general'. You are 'specific'.
> What prompted me to respond was that your objectives and your situation were not taken into account.
> 
> That's what financial planners are supposed to do. I'm not suggesting you go down that path. On the contrary, it would be better to become sufficiently knowledgeable to make your own decisions. Most people never get to that point. For them investing in an Index ETF may be the best alternative.
> ...


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## Habakkuk (10 October 2016)

anasttin said:


> I take it you're saying that I just sign up somewhere for an online share trading account that charges no more than $10 per trade and buy the VAS shares myself rather than going through a broker (I haven't looked at this sort of stuff for over a decade and can't remember).





No, I'm saying that I don't know of any broker who does that, $10 without disadvantage, namely they hold the shares in *their* name. That's OK for me, I'm not holding shares overnight, but if I was investing longer term ... that's what I meant. Maybe somebody else will have a suggestion for another broker.

BTW, some more explanations: you can't buy ETFs without a broker, on-line or otherwise. What you could do is buy Vanguard Australian Shares Index Fund and Vanguard Property Securities Index Fund directly from Vanguard, no need for a broker. But the minimum investment is $5,000 and the management fee is 0.75% and 0.90% respectively. You can look it up on their website.

You're obviously determined to get those ETFs. You might as well sign up with Westpac Broking for 19.95 brokerage or Nabtrade for $14.95
The extra $5 you could save if you find a cheaper broker will not be life-changing.

As to "set and forget", this would appeal to a lot of people, to get 9% guaranteed.

Now I'm even more puzzled about the confidence bit. More questions but don't answer them, just think about it.
1) How will you get confidence in yourself if you haven't got it now? You're only investing in an Index ETF. There is no skill required.
2) You surely don't mean to say that if Vanguard are still around in 2-3 years, you will have more confidence in them ...
Vanguard will be doing their job, tracking the index; they will be doing it well and for many years I have no doubt.
3) About the concept of ETFs I must admit to being uninformed. Probably because I'm not interested. E.g. how does it work for taxation? I know that the unit trusts pay tax internally each year and you get a statement from them. Is that the same with ETFs? If so, and if the two are basically interchangeable in terms of return and taxation, why does anyone invest in the retail funds and pay 5 times as much MER?. I don't get it.

Hopefully somebody will explain it to both of us.


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## anasttin (11 October 2016)

Hi Habakkuk,

Thanks for the response.  It's awesome to get a hand from such informed and experienced people so I really appreciate your time to help a newcomer.

I think there's a lot for me to mull over.

Thanks again.

Ana




Habakkuk said:


> No, I'm saying that I don't know of any broker who does that, $10 without disadvantage, namely they hold the shares in *their* name. That's OK for me, I'm not holding shares overnight, but if I was investing longer term ... that's what I meant. Maybe somebody else will have a suggestion for another broker.
> 
> BTW, some more explanations: you can't buy ETFs without a broker, on-line or otherwise. What you could do is buy Vanguard Australian Shares Index Fund and Vanguard Property Securities Index Fund directly from Vanguard, no need for a broker. But the minimum investment is $5,000 and the management fee is 0.75% and 0.90% respectively. You can look it up on their website.
> 
> ...


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## Habakkuk (11 October 2016)

Hi Ana,

I'm not all that informed or experienced, just looking around and researching stuff.

There were some clumsy and incomplete explanations in my previous post re: brokers.
I've had a look around for cheaper brokerage than Nabtrade or Westpac Broking. Basically all brokers want you to trade as much as possible, obviously. Some will have a minimum of only $9.90, Interactive Brokers have $6 brokerage. What's wrong with that? You need a minimum of $10,000 to open an account with them. Other "disadvantages" I mentioned were extra account keeping fees in some cases when you're not trading enough, some charge 'data fees' every month.
All (?) those cheaper brokers hold your shares registered in *their name*. With NAB and Westpac you will be CHESS sponsored. Your name is recorded as the owner. The ASX CHESS registry sends you a holding statement. The company sends annual reports to you. You can attend their AGMs and have a vote, etc., although this probably doesn't apply to ETFs. But the ownership of the shares is an important factor.

I've looked up Vanguard Shares ETF performance figures and the returns are indeed around 9% for the last 5 years and twice as much for the Property ETF. Very impressive. If it continues, the compounding would really be 'awesome'.

The taxation treatment of ETFs is still unclear to me. I know exactly how the retail managed funds work and are taxed and I would think that it must surely be the same for ETFs. But consider holding BHP shares instead for 10, 20, even 50 years. There is no CGT payable at all until you sell or die. With those retail funds you pay CGT every year. Are ETFs treated the same as shares? I don't know.

That's it from me. I hope it all works out for you.


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## peter2 (11 October 2016)

Yes, you'll have to create an account with a broker to buy shares in Aust and have them registered by CHESS. The costs vary from $15 to %55 per minimum parcel. Obviously the brokerage is quite significant on a $1000 parcel size.  I would suggest starting with more and make your future additions approx the same size. This is an averaging in technique that makes the timing of your investments a lot less significant. 

These are all details that you can learn from a bit more reading and research. 

What concerns me the most is your confessed lack of confidence due to your past experience in the market. How are going to stay invested when the value of your invesments fall again? They will fall and you're going to feel stressed. Are you ready to experience that "fear" again? Will you be able to stay the course for those ten years? If you sell again when your investment drops in value, you'll be sabotaging your long term plan. Good long term investors add to their investments when the market falls (prices are cheaper). Can you do this? 

If you have a good partner or a friend with similar financial goals you may be able to help each other stay the course. A good financial advisor will be able to help keep you focussed on your investment strategy and goals and help you stay the course. Unfortunately I don't know any like this and there are so few of them. It's a more costly option also. 

All the best.


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## Sir Burr (11 October 2016)

Habakkuk said:


> I've had a look around for cheaper brokerage than Nabtrade




How about free for a few months. No idea if there is a catch...

https://www.nabtrade.com.au/landing...&utm_medium=email&utm_campaign=Campaign offer


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## mjim (13 October 2016)

Interesting discussion so many scenarios!
so we are talking about two diff things?
A) ASX listed ETF which track US index and are perhaps Currency hedged ( at a cost)
B) USA listed ETFs which track US index  and are traded in US$ so you would have currency risk

so if  Purchasing USA listed ETF's is it not same as buying USA listed shares? as far as execution is concerned
As far as Tax CGT is concerned...if somebody can explain what the treatment would be for AUS  tax payer
If you open an account with a US based broker I think they ask you to sign some form for being a NON US resident for tax purposes making sure US tax is not withheld on dividends! 

Also  Somebody mentioned ".. will probably hold your investment longer than the broker will remain in business. Our Aussie CHESS system seems more reliable long term. 
IS this true with AUS brokers or US brokers?
Because with US brokers would there also not be similar arrangements so the shares/etf are held on your name ( it again depends upon if you are using margin or not!)

So back to the ETFs to track US index... SPY and QQQ are popular and liquid
Broker: Options express both AUS and US regulated) or IB (10K min lower brokerage + data fees)
There are other popular brokers in USA like TOS but they won;t allow AUs residents to open a/c


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