Building a Truly Global Portfolio with ETFs

Cross border families with investments located in the United States must be very careful to avoid investing like regular Americans. Doing so can put your long-term financial health at risk as you likely have a more globally oriented retirement future. This article will explain the importance of maintaining a more worldwide exposure to various investments and currencies. Your multi-national lifestyle requires it.


Key topics to be addressed:
• The advantages of keeping investments in the U.S., but with a worldwide perspective
• Explaining ETFs and their benefits
• Examples of U.S. ETFs, and how they compare with international funds
• Building worldwide portfolios for cross border families



Hello and welcome, my name is Andrew Fisher. Today I’m going to walk you through a slideshow on global investing. This is the second in a two-part series on investing for cross-border families. Last week we discussed why it’s important to invest globally, both across regions and in currencies around the world. In this talk we are going to discuss using ETFs inside of a US brokerage account to achieve worldwide diversification.


Now many cross-border families struggle with where to hold their financial assets. Should you hold them in your home country or in the US or perhaps in Switzerland or some other offshore jurisdiction? We see people doing all the above. Now to achieve worldwide diversification, it’s not necessarily where your accounts are located. We see people who think that they need to maintain an account Switzerland, an account in London, an account the US. That’s not the case; it’s really about where your underlying asset exposure is.


For example from right here inside of a US account we can own a German bond denominated in Euros, or a Brazilian stock denominated in reais. Now why hold the investments in the US? We recommend our clients maintain and build their worldwide portfolios from a US account. I know if you’re a US resident their huge tax reasons to keep in your investments here.


There’s also other advantages like lower-cost, our system is much lower cost compared to most Europe and Asia. Greater transparency, we have quite a bit more investment choice here in the US due to the size and scale of our capital market system. And in the last few years we now have multi-currency accounts, where we can if very efficiently convert foreign exchange, hold foreign currencies in the accounts and move money very easily around the world. Of course if you have a 401k or an IRA in the US, you already have to keep these cap accounts here in the US.


Now let’s talk a little bit about ETFs, which are one of the main tools we use to build global portfolios. An ETS stands for Exchange-Traded Fund, which is basically a security that tracks a basket or the valuable of an underlying index commodity or basket of assets. Generally, it’s one fund that owns a pool of underlying securities. The S&P 500 for example, that ETF holds all five-hundred the S&P 500 chips.


Now, why ETFs? They’re an extremely low-cost solution compared to the more traditional mutual fund model. They offer greater tax efficiency than mutual funds because they don’t distribute their capital gains every year in a taxable distribution. And we’re able to use them to seek better diversification while still trading like a stock throughout the day. So it’s much more efficient and easier to use.


Now there are foreign ETFs as well, but they contain some tax traps and pitfalls. So I thought we might examine two funds from the same fund company, iShares, but with very different properties. Now, both are these funds track the S&P 500 index and they both contain the exact same exposure, the exact same investments inside of the fund.


Now the fund on the left, you’ll notice, is domiciled in Ireland and trading in British pounds. The fund on the ride is registered under US law and trades in US dollars. The fund domiciled in Ireland has a much higher expense ratio than the fund in the US. The offshore fund, the Irish fund, is viewed very negatively by the IRS. It’s viewed as a PFIC, or a Passive Foreign Investment Company, which means it doesn’t provide 1099 reporting to the US or to you to use on your tax return, which also means that, that investment does not qualify for the lower tax rates here in the US on long-term capital gains and qualified dividends. The US fund does qualify for all of that.


Now let’s talk about how we use ETFs to obtain true currency diversification around the world. I thought we would just go through an example of one fund. This is the iShares MSCI France ETF, ticker EWQ, and it holds a basket of major French equities, French shares, obviously all denominated in Euros. Of course we buy the fund here in the US, from a US account in US dollars, it’s denominated in dollars.


So let’s say that we buy ten shares of this in the beginning in 2013 when the MSCI France index is at 100, which means the sum of all the different shares inside of this fund equals a hundred. Now come the end of the year, let’s say that index is still at a hundred, meaning in the aggregate all the shares of France have not risen or declined during the year, they’re flat. However during that year let’s say the Euro appreciates 25% versus the US dollar. So if we go to sell these ten shares at the end of 2013, despite the fact that the index has been, flat we will be able to sell to find at a 25% higher price in what we pay: so despite the product being denominated in dollars the true exposure of this fund is to the French market and the Euro.


So this is the principle we use in our International Lifestyle Portfolios, to seek real global diversification. We’re able to build truly worldwide portfolio from right inside of your account at Fidelity Investments. The portfolios were designed as a single coordinated solution for US based assets, all designed for the unique needs of cross-border families.


Thank you very much for listening today, please feel free to contact us at any time to learn more. Thank you very much.