Author Topic: There´s no Vanguard in my country, what do I do??  (Read 628 times)

Andeanmustache

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There´s no Vanguard in my country, what do I do??
« on: July 04, 2018, 06:20:17 PM »
Hi everyone,

I live in a Latin American country where there are no Vanguard type index funds. From reading this forum, I understand that they are the preferred vehicle for long term investment due to diversification, low cost and high expected return over the long run. Regrettably, as they are not available in my country, I'm having a hard time finding options that cover these criteria.

The following options are available:

- Term deposits in local currency: depending on term and amount, they can yield up to 7% annually. No risk as they are covered by deposit insurance up to USD30k equivalent per institution. Tax exempt.

- Mutual funds: all are actively managed (no index funds) and charge large fees (up to 3% in some cases).

- Buying stocks in the stock market directly: the local stock index is highly volatile (large exposure to the commodity cycle), so if adequately diversified and on a long-term basis, should be a good investment. However, broker's fees are high (around 1% per transaction with a minimum of ca. 15USD equivalent). Hence it is necessary to invest relatively large "chunks" and also difficult to diversify.

- Voluntary contribution to AFPs: in my country and many more in Latin America, the pension system is based on mandatory private funds called AFPs. 10% of salary is deducted monthly and tranferred to the employees´ AFP account, which is administered basically as a mutual fund. These funds can only be accessed at retirement age. There is an option to contribute voluntarily any additional amount to these funds, and these voluntary investments can be redeemed at any time. Fees are around 1.8% though.

From a diversification and expected return point of view, it would seem that voluntary AFPs are the best choice. However, the fees are significantly higher than those recommended in this forum.

Should I instead slowly build a stock portfolio (buy and hold, no trading)?

m

yachi

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Re: There´s no Vanguard in my country, what do I do??
« Reply #1 on: July 05, 2018, 07:06:34 AM »
If you can open an in-country brokerage, you could buy Vanguard ETFs, which trade on the stock market, but are like Vanguard funds.  It will be difficult for many to comment since the most optimized path to save depends on specific tax laws in your country.  Keep in mind there is a difference in retun denominated in local currency and returns based on US dollars.  This is especially the case if currency manipulation is happening as there could be a sudden reset of the exchange rate.  It looks like your near the Andes in South America.  Which country?  Do you eventually need to spend the money in the US?

Andeanmustache

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Re: There´s no Vanguard in my country, what do I do??
« Reply #2 on: July 08, 2018, 07:00:33 PM »
Hi Yachi,

Thanks a lot for your reply! I live in Peru and opening a US brokerage account appears to be possible and relatively straightforward. There is one downside to that though: apparently non-residents are charged a whitholding tax on dividends of 30%. There is no mention of withholdings on capital gains (but these would be taxed in my country). In that case, would it be better to invest in ETFs that automatically reinvest dividends? I'm not sure if there are additional or hidden transaction cost that I am not aware of.

You also raised valid points wrt returns in local currency and USD. I´m mostly interested in the former, since I intend to stay here and pretty much all my expenditures are in LCY. The Peruvian currency has been very stable vis-a-vis USD in the last two decades and inflation has been in the 2-3% range, so real returns in both countries are roughly comparable.

I do not foresee needing to spend my savings in the US. My concern is more to find an efficient way to invest, and the options here are apparently more costly or lower-return.


yachi

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Re: There´s no Vanguard in my country, what do I do??
« Reply #3 on: July 09, 2018, 07:40:06 PM »
There are Peruvian brokerages that allow you to buy on foreign stock markets.  It looks like Interbank allows you to buy on American and Canadian exchanges.  You should be able to buy an ETF there since they trade just like stocks.  You would be looking for VTI on the New York stock exchange.  I'm not exactly sure what the trading fees look like though, but this way all your taxes are Peruvian only.

Andeanmustache

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Re: There´s no Vanguard in my country, what do I do??
« Reply #4 on: July 09, 2018, 09:31:36 PM »
Thank you Yachi, this is very helpful. Indeed it appears I could buy IVV, IVE and SPY at the local stock exchange (among several others, I am only listing those that track S&P 500). If I understand you correctly, there would be no withholding tax on dividends applied at US level? At local level I would have only income tax on (I assume) realized capital gains.

If the above is correct, it appears that IVV would be the preferred option due to the lower expense ratio.

Trading fees apparently are the same as individual stock, i.e. around 35 USD per trade. So that I would need to optimize the size of "chunks" in order to minimize fees.

One additional issue would be dividend distributions: I am not sure if I would have the option of automatically reinvestment of dividends.

On a more general note: since inception (2000) IVV has had an average annual return of 5.9%. Of course, in the last 10 years the average return was 8.9% and some years higher, but that isn't that much different to the 7% I can get on term deposits in local currency, risk free, tax free and without fees. From a diversification point of view, a 50/50 split between IVV and term deposits in local currency might give me sufficient market exposure plus an OK risk free yield. Does this make sense or am I missing something in the comparison?

imolina

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Re: There´s no Vanguard in my country, what do I do??
« Reply #5 on: July 09, 2018, 09:36:55 PM »
I am also trying to find a way to invest in Colombia without paying high fees. But as you pointed out, term deposits offer a good return without any risk, but is there anything better?. I don't live in Colombia anymore, I am looking for info to help my brother and mother invest better.

yachi

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Re: There´s no Vanguard in my country, what do I do??
« Reply #6 on: July 10, 2018, 08:31:50 PM »
I did some digging and I think you would still have the withholding tax.  I'm not sure who collects it when you use a Peru-based broker. 
I've usually had to select if I wanted dividends reinvested or not with whatever brokerage I'm using.  The fund would pay dividends and your brokerage would either buy more of the ETF with them, or pay them to you.  Either way, it still counts as income for withholding purposes.

I just got done looking up the inflation rate for Peru to make sure it's reasonable.  One thing I was thinking was maybe it's 7% because inflation is high, but it looks like Peru is keeping inflation to a reasonable 1 to 3%.  Your term deposit sounds like a great rate.  Make sure you're comparing your options in the same currency, or adjusting for currency movements, and make sure you're including dividends.  Half in that and half in IVV doesn't sound like a bad idea to me.  You'll want to be rid of any debt higher than 7% first.

Andeanmustache

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Re: There´s no Vanguard in my country, what do I do??
« Reply #7 on: July 16, 2018, 07:00:25 PM »
Many thanks again Yachi! I would still need to estimate the impact of the withholding on expected return of the IVV, but indeed a 50/50 split might be ok.

With regard to debt repayment, unfortunately my mortgage is 7.25% (I don't have any other debts). I have prepaid some already, but since the returns are close, I think saving is the safer option for now (late I can decide if I apply some portion of my savings to prepaying the loan).