Investing in Switzerland

Hi, I'm considering to start investing my savings. So far through my research I found out that it's best to invest in all-world index based ETF's, as they provide highest returns in the long term, are low-maintenance and low-cost.

I still have many questions unanswered and I was hoping you could provide me some advice.

The withholding tax for dividends is 35%. Can I somehow get this money back? I have a B permit. There are accumulating and distributing ETF's. Is there a tax difference? Which is more suitable if I consider to only buy at least for the next 10 years? Is there any capital gains tax if one day I decide to sell my equities? I live in canton Zurich. Which broker do you recommend? Many suggest Swissquote, but I found Corner Trader: it charges 0.12% per transaction and has no custody fee. Is there any way and benefit to invest in ETFs through a retirement account? I read that you can invest directly (without a broker) in index funds with Vanguard. Do you know how? Would my portfolio be subject to any wealth tax? Would it be beneficial to pay normal tax instead of quellensteuer? (either through getting a C permit in the future or getting a salary over 120 000) There are several ETF's following the same index. For example, for S&P 500 there is Source (0.05%), iShares (0.07%) and Vanguard (0.07%). Are there any differences between them apart from expense ratio? Any risks involved?

I would be very grateful if you could help!

There are several threads on the forum here regarding investing. Here’s one that might help.

Investment fund

fatmanfilms is keen on Fundsmith.co.uk so it might be worth looking at that.

Use a US broker & only 15% gets withheld, which is much closer to normal taxation. Only Swiss brokers withhold 30% of US securities

And here's a meri broker: https://www.tdameritrade.com/home.page

The Swiss Franc (CHF) tends to rise against every other currency (no exception I'm aware of), see for instance historical rates on fxtop.com. For instance the USD lost 2-4% per year over most multi-decade periods (even ignoring the '70ies on the grounds that exchange rates had been locked before then, and once they floated it took them multiple years to find an equilibrium price). That means your US stocks need to outperform your Swiss shares by 2-4% each year just to make up for that currency loss. For example if your USD stocks gained 100% over the 25 years you held them, and assuming the USD keeps losing 3% on average against the CHF, their value in CHF would be the same as you bought them for (ignoring dividends here to keep it simple).

In many cases you can buy ETFs that hedge currency risk, but that comes with a cost of its own (check the prospectus). No idea what's best, just highlighting a point worth considering.

1. You get withholding tax back by by filing a tax declaration and providing proof. If you're taxed at source I think there's a particular form, though I could be wrong. Ask your Steueramt.

2. No difference. But since you get less to (re-)invest, which comes with broker fees, accumulating is slightly preferable.

3. Under certain circumstances capital gains can be categorized as taxable income, but that won't happen if you hold for years. So no CGT in CH for you.

4. Depends on what you buy and how often, so whichever works for you. One advantage of a low cost broker is that switching also comes relatively cheap should you change your mind.

5. Not an option for 3rd pillar AFAIK, that typically comes with very few funds available all of which tend to not be very low-cost. Personally, I regard 3rd pillar as a part of the cash portion of my investments. For 2nd pillar the Pensionskasse does all the work, you have no say.

6. Open an account with them as non-US private investor. Just be aware that AFAIK that means you (your heirs) are subject to US inheritance tax upon your death (just saying). And there may be issues with their tax form, ask your Steueramt.

7. Yes, most personal wealth is subject to wealth tax, AFAIK only 2nd and 3rd pillar are exempt.

8. Only you can answer that. Have a tax declaration made and see what's better for you, shouldn't cost more than 200CHF if you're employed and not owning real estate.

9. Funds usually buy and sell "at market" price, for which there's a bid and ask price. By necessity there's a small difference between the two, it's called spread; the less liquid a security is the bigger its spread. As a consequence of a round trip (buy xy shares and sell xy shares of the same company) the fund loses the spread (because it sells at bid and buys at ask), a hidden cost hardly anybody talks about and that's not included in TER. The higher a fund's turnover the more often it is hit, and the less liquid the securities it invests in the harder it is hit each time. Therefore, and everything else being equal, the lower its turnover the better.

9b. Risk with respect to bankruptcy is the same for any ETF because every ETF is a legal entity of its own. As a consequence even in case of bankruptcy of UBS, Deutsche Bank, iShares, S&P, Lyxor, or whoever else may be the funds' sponsor or your broker, your money invested in any ETF is safe.

9c. Tracking error; usually is negative and means slight underperformance to the index. Usually less than 0.1% so not really worth making much of a fuss about unless perhaps a contender showed a positive tracking error.

For completeness sake:

Contrary to ETF, ETN are a credit and as such come with creditor risk, i.e. are at risk if the debtor were to go bankrupt.

Some (but not all) ordinary funds come with issuiung(?) and redemption fees of 0-5% each. Personally, I would never consider buying any that do, though unfortunately that can change anytime.

Thanks for your input Medea! This was a long read. I also checked out Fundsmith. After reading some "Boglehead" blogs, this fund looks interesting. What I like is: long term investing, no market timing, future-proof.

So far, the fund has had excellent results (although it was a short timespan). However, it really speaks to me that you can't beat the market. Why would this particular fund have this capability?

A comfort of an index fund is that nobody will con you, nobody will make a mistake. And I don't want to entrust all my money with a fund I don't know, just because Mr Fatmanfilms has been advertising it so strongly.

Hi Fatmanfilms! I'm new to this forum, but I've read a few topics, and I see you're a very active member. Nice to see you respond! But now I'm confused! You tell everyone to buy UK-based Fundsmith, now you tell me to use a US-based broker, and yet I read it's possible to get your withholding tax back? And is it 30% or 35%?

If the withholding tax can go back into my pocket, then it would seem more simple to keep my investment in Switzerland. And if you invest in the UK, are you not subject to their taxes?

That's a big reply! Thanks Urs Max! And it's an interesting comment about the CHF. But 25 years seems a very long time, I guess the S&P500 doubles in less than 10 years on average?

So I can get it back? That's great. I will definitely go to Steueramt and ask.

Again, great.

I only plan to buy and keep, as I have no idea about the market. I plan to invest in tranches. For example, if I put 15 000 in Corner Trader, They will charge me 18 CHF for this. And that's the only cost (plus stamp tax).

Ouch. So if Vanguard charges 0.07% for a S&P500 ETF and 0.25% for the fund, then what's the point in investing in the fund? ETF has lower cost, even considering my broker fees.

I just checked online and if my wealth is 308 000, I need to pay 115. with 694 000, it's already 501. As long as it stay's under 0.1% per year, I can live with it.

Do the funds following the same index use different strategies of trading? Can you compare their long-term difference somewhere, including the tracking error?

So I should just buy the index with the lowest TER? There is no such thing as reputation for iShares, Source, Vanguard? Why do people praise Vanguard so much, saying it's non-profit, etc, if there are cheaper alternatives?

If you buy and sell securities (stocks, ETFs, futures) a number of times in a year and also trade FX do you pay CGT or you don't?

This is a very good point. What is the best way to invest CHF in your opinion, Urs? Swiss stocks?

You can't hold Fundsmith with a US Broker, you can hold tracker funds with a US Broker.

Fundsmith can beat the market as it dies not attempt to track the market in any way. The fund manager believes there are about 60 companies in the entire world worth investing in. Not a single Bank, Insurance company, Car manufacture, Oil producer or property company will ever make it into the fund.

You could look at the Fundsmith strategy & then go back 25/50/100 years to see what would have happened if you applied it. You will see a compound growth hugely in excess of the market.

OK, but if you can reclaim the withholding tax from the Swiss Broker, then why buy at the US Broker? You would need to convert the CHF into USD and send it every month to USA. And does USA not levy any taxes on this Investment?

And the same question with Fundsmith: are there no tax Problems when you invest in a fund in UK? You mentioned before something about a Feeder fund in Luxembourg, it's not clear to me what that means.

What you're saying is very tempting, it makes a lot of sense. But in the end you have to trust, that the fund guys will not make a big mistake or trick you. How could we know? How can you entrust all your wealth with one fund and tell everybody around to do the same. What makes you so sure about it?

It makes sense that these companies outperform the market in tough times, because they deliver necessity goods. But they should fall behind in times of prosperity, when innovative companies are booming, no?

You don't.

There is no withholding tax on either Luxembourg or Uk holdings as far as I know, no CGT for Swiss residents.

I don't pay an taxes on my US investments other than withholding tax.

I have watched the fund manager stick his neck out many times in the last 30 years & was always right to date. Whilst head banking analyst for BZW he put out a sell note for the parent company Barclays. Whilst at UBS Philips & Drew he wrote a book that criticised many of his firms clients accounting policies. He was told he would be sacked if he published the book. He was sacked & totally unemployable for 18 months, then 1 company mentioned in his book went bust & another had a huge fraud enquiry, several other issues emerged at the other companies..........

High risk growth companies can seem exciting, however on balance they don't produce as good returns on average, so the risk reward ratio is not as good over time. The one thing you know is there will always be many times of fear & uncertainty, when things are going well the companies will do OK. Nobody can predict the day the market changes, over 90% of fund managers under perform the index they are trying to beat. They all do this because they are so clever & one step ahead. Unfortunately they are ALL 1 step behind as they all react together.

I have invested in equities myself for over 35 years, I have been very lucky occasionally & made a lot of money. Terry Smith's way will produce as good a return on average on a 5 year basis with much lower volatility, which is why I commit so much to his fund.

It depends. There's no clearcut case, but one indicator used is, turnover more than 500%. See link below (German page), taking note that all criteria need to be fulfilled in order for your gains to be tax free with certainty:

http://www.moneyland.ch/de/boersengewinne-steuern

So the ETF is what you want to go for. I'm not aware of any practical difference between ETF and ordinary fund. If you're interested, search for track error, info on that should be easy to find. You should also, and always, consult the prospectus. And as mentioned, I would also check turnover, an index fund should show rather low turnover in quiet times such as recent years.

As for different buy/sell strategies by the fund, I have no idea nor do I care; what I care about is that the fund actually buys the shares, as opposed to replicating the index.

Lots of sites offer instruments for long term comparison, search. I used to like finanyce.yahoo.com for their simple layout, not sure I like their recently updated one. google.com/finance is another one.

Vanguard made its name before ETFs appeared, they were the pioneer. At that time they were the least expensive and most transparent bar none. They may not always be cheapest these days, but in all likelihood you won't do much wrong even if you blindly buy their products.

That. Exactly that.

(that's not intended to mean anything against FMF at all)

Same applies to the ETFs you do buy, spread your nest eggs over multiple baskets, you never know. It's highly unlikely for an ETF to run into trouble (impossible in theory), but Bernie Maddoff was highly regarded as well and Enron was the envy of all Wallstreet before its frauds came to light and took down Arthur Anderson with them. You simply never know.

Also, it's usually risky to play one theme only, consumer staples and discretionaries in the case of Fundsmith. 15-20 years ago it was the 'net stocks, before that it was biotech, these days it's consumer staples, next year it may be biotech again or 3D Printing or whatever. If anything, try to be ahead of the crowd or ignore it altogether.

I'm 51, expecting to start consuming my savings in 10-20 years. And yet my investment horizon still spans 30 years or more.

A double every ten years, that's 7.2% annually (see Rule of 72). Obviously possible for a few years, but eventually the return will revert to its mean. Considering that interest rates are at zero these days, which makes the backwinds from falling interest rates highly unlikely, and also noting that most major indexes are at or near all-time tops and valuations are rather high, 10% is rather unlikely for quite some time.

"My" currency is the CHF so yes, most stocks I own are Swiss. And yes, with a multi-year horizon I see no alternative to stocks.

Portfolio theory says to diversify, but that comes with risks of its own.

Most swiss stock/companies however get a significant share of their revenues, if not the majority, from foreign business to begin with, that's an investment abroad in its own right. And I think that the natural hedges inherent to those companies (cost and revenue balance each other, more or less, largely cancelling currency effects out) and the professionl work by the CFOs lead to better results than I could ever hope to get. In short, I get professional service without paying extra.

Rule of 72, if it doubles in 10 years it increased at 7.2% compound.

10% growth doubles in 7.2 years

You're right, I've corrected that.

But if you buy the S&P500 or All World index, you get a self-cleansing, diversified Portfolio. What would be so wrong in putting 100% in a broad index? What is the Point of putting a bit in SMI, a bit in Euro, a bit in USA? All World does this for you.

I agree. There is always an imbalance in the market, the first to see it will Profit and by the time everyone notices, the imbalance is gone.

That's correct. 2 ^ (1/10) =1.07177

BTW, total return of S&P500 in the last 20 years:

http://finance.yahoo.com/chart/%5ESP500TR

(4092/833)^(1/20) = 1.08284

8.3% annualized return in a predio with Dotcom and sub-prime bubbles. Not bad. And you expect the next 20 years will be worse, Urs?

Are you including dividends in that?

I think it will be higher, 50/100/150 years gives 10-11% compound

Consumer discretionary beats those no's by a huge factor

We've had lots of supportive factors that are unlikely (probably impossible in the case of interest rates) to provide an additional boost in the future, such as falling interest rates (which allow for higher valuations), generally rising profit margins, and falling corporate tax rates. At best they won't swing back.

I don't "expect" as such or I wouldn't hold (much in) stocks, it's more like the odds look unfavorable (see Schiller PE, same applies to most major markets). There's no such thing as absolute certainty, that's also why I'd tend to use more than one ETF even if they're both based on the same index - very inexpensive insurance if you will.

SP500 TR (total return ie with dividends reinvested) was introduced in june 1988 (started at 271), closed 2016 june 30 at 3968 (about 1930 adjusted for inflation), that's 10.5% annualized (7.6% after inflation).

Berkshire Hathaway (BH) has been holding KO for half an eternity, probably 50 years by now, meaning Buffet and Munger were most aware of the opportunities in the sector. With about 20% annualized return since 1964, the two obviously know a thing or two. Yet what you say implies that they didn't notice that the sector in general, as opposed to a select few companies, yields superior returns. That just doesn't add up.

This is a cool site: https://dqydj.com/sp-500-return-calculator/

So a $1000 invested in 1986 would be worth now $16000. That's a 10% annualized return. And if you adjust for inflation, you would have $6730, 7% return.

Interestingly enough, this 3% difference looks similar to the devaluation of the dollar in relation to the swiss franc. is the conclusion that the swiss franc maintained it's value?