So basically, there's no way to invest directly into index funds from within EU, right ?
Not in the index funds Vanguard offers to its US-based clients, but there are alternatives. It shouldn't be hard to find a German bank through which you can buy the institutional share class of an index fund, be it an index fund from Vanguard or another company. Of course, this may not be as economical as buying ETF shares through a discount broker, because the bank will probably charge you a fixed percentage of the value of your shareholding.
Another alternative, and one that is particularly popular among Dutch mustachians, is
Meesman. It's a company that acts as an intermediary between private investors and index fund providers like Vanguard and Northern Trust. You can authorise them to debit your bank account for a fixed sum each month so you can just set it and forget it. They're even open to investors outside the Netherlands... It's just that their website is only available in Dutch. Less than ideal if you only speak German, but perhaps your Dutch is better than my German. :-)
which is kind of scary... luckily, I've found a broker which apparently has no transaction fees on buying ETFs.. www.degiro.eu/
I'll do some more research and will most likely go with that.
I have an account with DeGiro and there are a few important caveats:
- Transactions in only some ETFs are free - check the list to find out which ones.
- If you're buying ETF shares on a US stock exchange, euro->dollar currency conversion will still cost you some money.
- There is a fixed annual 'connection fee' for investors with securities that are listed on certain exchanges.
- DeGiro will either lend your securities to third parties (fully at your risk!) to generate money, or (if you choose to have a 'custody account') it will take a certain percentage of any dividends you receive.
I'm not saying DeGiro is necessarily a bad choice. Just read the fine print very very carefully and know what you're getting yourself into.
What do you guys think about diversifying the ETFs into
1. US total stock market index
2. international total stock market
3. US total bond market index
Fine for a US-based investor, but if I were you I'd want some or even all of my bond exposure to be either euro-denominated or currency hedged. How about something like
Vanguard EUR Eurozone Government Bond UCITS ET or
iShares Core € Govt Bond UCITS ETF or even
Think iBoxx Government Bond UCITS ETF? Don't dismiss that last one out of hand, by the way. It's the only one of the three that doesn't engage in securities lending, which I personally consider a pretty big advantage.
Lastly, consider whether a regular old savings account might be a better alternative for a bond ETF, at least for now. The yield on investment-grade euro government bonds is pretty low at the moment, so a savings account could potentially be the better choice for now.
Also, my next step, after deciding which broker to go with and what ETFs to buy would be to look into taxes and dividends (not that they would be related, just mentioning them in one sentence).. if I understand correctly, most EU based ETFs hold the dividends and pay them out quarterly... as ETFs are traded like stocks, there's no way for me to re-invest these dividends immediately, unless I sell my current ETF and buy a new one - so basically I can't take advantage of compound interest.. or am I just thinking completely wrong about this ?
Further to Heckler's answer, it's my understanding that ETFs and index funds typically use derivatives to prevent dividends received by the fund sitting idle until the fund's next dividend date. The returns generated with these derivatives are equivalent to what would have been earned by reinvesting the dividends within the fund.
