ETF investing has surged in recent years thanks to the expansion of low-cost online brokerages and the impending financial crisis younger generations face regarding their financial futures.
Expats, in particular, have taken to online brokerages in an attempt to secure their personal finances and circumvent “independent” financial advisors. Inevitably, a lot of do-it-yourself investors stumble across the term ETFs and realise they should be investing in them.
Sadly, understanding financial jargon isn’t always easy and a lot of people scratch their heads when it comes to actually investing. So, I’ve put together this comprehensive ETF investing for expats guide to explain how and why you should invest in them.
What is an ETF? ETFs là gì?
An ETF, short for Exchange Traded Fund, is a collection and combination of assets (such as stocks, bonds, commodities etc.) which are pooled into one tradeable security, aka fund. Most commonly, ETFs will track specific industries, regions, commodities or assets, but the most popular type of ETFs are the ones that track specific indexes such as the S&P500 or VN100: these ETFs are known as Index ETFs.
The explanation above includes a lot of fancy words and I know you’re not here for that, so let me simplify. Imagine that you are in a Donut shop and you want to buy 12 doughnuts. Instead of having to buy each doughnut separately, the Donut shop will have a 12 box assorted mix ready for you to buy. Since it’s easier and you’ll save time, you’ll probably just buy the assorted mix rather than buy 12 donuts independently.
ETF investing works in the exact same way as buying the assorted doughnut box! However, except for receiving just 12 different doughnuts, the ETF may contain several hundred or thousands of assets (shares, bonds, crypto). By already providing us with a collection of stocks, bonds or mixed assets, ETF investing gives us a fast and cheap way to invest in lots of different things at the click of one button. So instead of having to find, study and buy multiple different investment assets, you just have to find a couple of ETFs that you like that invest in the stuff that you want. Simple!
Why ETF investing is all the rave
Index ETF investments, often synonymously and incorrectly referred to as Index Fund investment, has become all the rage over the last couple of years. Gen X’s, Millennials and, more recently, Gen Z’s have realised that the financial system as it stands does not benefit us and so we’ve had to find other solutions to secure our financial futures. As they’re a low-cost, hassle-free pathway into investing, ETF investing has become the solution.
ETFs are also great for long-term investing because you can invest and forget. Since ETFs incorporate all the best shares that you’ll likely want to invest in anyway, there is absolutely no need to complicate your investment strategy by trying to do due diligence on thousands of stocks when you can just research a few index ETFs.
How to invest in ETFs as an expat?
In order to invest in ETFs as an expat you need an online brokerage account and an ETF investment strategy. It does get a bit more strategic than that, but the main point is that it is easy to get started and ETF investments are available to expats, despite what some may tell you.
True Story: I consulted for a client who was told by one of the big banks here in Vietnam that it was not possible for him to invest in foreign based ETFs. It’s probably due to lack of training, but this “financial advisor” probably thought this because you can’t invest in foreign ETFs through the advisor’s bank. In fact, I would recommend that expats avoid investing through banks in general simply because banks usually only sell their own products: products which nearly always come with expensive, and excessive fees.
So how do you get started? Below I lay out a three step guide to getting started with ETF investing.
Step 1: Open an online brokerage account.
An online brokerage is essentially an investment platform which allows investors to open an account and get access to stock markets. There is no specific ETF investment platform, but through investment accounts we can buy or sell any number of assets such as equities, bonds, commodities, or invest in ETFs.
The online brokerage, therefore, acts as our virtual middleman and aids us in our investment journey. Of course, brokerages aren’t doing this out of goodwill so they do come with their own cost; however, if you stick to the major online brokerages you will be paying the bare minimum. A couple of the best online brokerages for expats are listed below.
- Interactive Brokers (IBKR) – Recommended
- TD Direct Investing
- Trading 212
- Saxo Bank (Seems to no longer allow investors from Vietnam)
Several online brokerages also offer retail investors the option to automate their investments or to invest in managed portfolios. In essence, these managed portfolios are the same as ETF fund managers and they diversify your investments according to your risk profile, wants and needs. The privilege does come with an added cost, but sometimes it is worth it for those who don’t want to handle their own investment portfolio.
Step 2: ETF investment strategy
Having an ETF investment strategy is the fastest, cheapest and easiest way to diversify your investments. It is also, arguably, the best long-term investment strategy for the vast majority of investors. You should also rely on ETFs as investments since they automatically diversify your money which brings security and can be automated which saves you a lot of time and hassle.
What is an ETF investment strategy?
An ETF investment strategy is simply choosing a few different ETFs to invest in that interest you and give you the best possible return at a cheap cost. Your specific strategy, however, should be based upon your specific risk tolerance which takes into account your:
- Age
- Financial situation
- Long-term goals
- Current residence
- Country of nationality
- Risk tolerance
- Investment time horizon
- Financial and investment knowledge
How do you build an ETF investment portfolio?
When you build an ETF investment portfolio it should consist of ETFs that go hand in hand with your investment strategy as outlined above. For example, there would be little point investing solely in Bond ETFs if you’re 25 and looking for long-term growth unless you are very risk adverse.
When you build your ETF portfolio you also need to do your due diligence and consider the following.
- The currency you want to invest in (USD, GBP, EUR, AUD etc.)
- Stock exchanges to avoid – non-US residents and citizens, for example, should consider avoiding ETFs listed on US stock exchanges for tax reasons
- Expense ratios, aka Management Expense Ratio (MER)
- Diversification
- Allocation percentage
- Asset class distribution
How many ETFs should you invest in?
Investing in between 2-4 different ETFs is a good place to start. Any less than two ETFs might not be diverse or well enough distributed, while any more than four ETFs in your portfolio could be considered redundant. Remember, ETF investing is meant to be kept simple and to set you up for financial freedom in retirement, not for trading or getting rich quick.
A beginner investor could use a couple of different ETFs to build a simple investment portfolio which could be split between 70% equity ETFs and 30% bond ETFs. Additionally, long-term investors can consider investing in the entire world, while also focusing on their home region and include bonds to stabilise the investment portfolio against too much volatility.
A simple low-cost ETF portfolio for non-US residents and citizens can be seen below and could be well suited for younger European expats with a moderate risk tolerance to investing and who have a healthy financial profile.
| Asset Class | Allocation Percentage | Fund | Ticker | Expense ratio (cost) |
| Equities | 50% | iShares MSCI ACWI UCITS ETF USD (Acc) | SSAC | 0.20% |
| Equities | 20% | Vanguard FTSE Developed Europe UCITS ETF | VEUD | 0.10% |
| Bonds | 30% | iShares Core Global Aggregate Bond UCITS ETF USD (Dist) | AGGG | 0.10% |
I’ve found that many expats want to invest in the country where they live. Those residing in Vietnam and who want to invest in Vietnam could include a Vietnam index ETF that tracks the VN100. The investment portfolio could look something like:
| Asset Class | Allocation Percentage | Fund | Ticker | Expense ratio (cost) |
| Equities | 40% | iShares MSCI ACWI UCITS ETF USD (Acc) | SSAC | 0.20% |
| Equities | 20% | Vanguard FTSE Developed Europe UCITS ETF | VEUD | 0.10% |
| Equities | 10% | VINACAPITAL VN100 ETF | FUEVN100 | 0.67% |
| Bonds | 30% | iShares Core Global Aggregate Bond UCITS ETF USD (Dist) | AGGG | 0.10% |
It is important to understand that I am not specifically recommending that anyone invests in Vietnamese stocks, Vietnamese listed ETFs or Vietnamese focused ETFs. Investing in Emerging Markets is incredibly volatile and while the VN stock market has experienced significant growth in the past, you should never base future performance on past successes.
If you do want to invest in specific emerging countries, either limit your exposure by keeping your total allocation percentage to these countries very low, or invest in specific Emerging Market ETFs that cover whole regions such as Asia ETFs or APAC ETFs.
Note: None of this should be taken as investment advice. Investing comes with significant risk and money invested can be lost. If you are going to invest yourself, make sure that you have your personal finances in order with a good buffer in case of emergencies. You should also never invest more than you can afford, which means that you need to ensure that you have enough liquid assets to cover any unexpected costs that may arise. You should also never invest money that you will need in the next 3-5 years. Investing is a long-term solution for your retirement. Not a 5 year get rich quick scheme.
Rebalancing your portfolio
Rebalancing your ETF investment portfolio is incredibly important. Over time, your investments will (hopefully) grow, but grow at different rates. This means that your exposure to a certain ETF, asset class or geographical region which may become inflated and leave you over-exposed to unnecessary risk.
By rebalancing your portfolio once a year, you bring your exposure back in line with your allocation strategy and your accepted risk tolerance. Read my full article on rebalancing your investment portfolio for a full breakdown into how you can successfully manage your ETF investing.
What you need to know before investing in ETFs
Exchange traded funds are excellent investments for beginner and intermediate investors, as well as individuals looking to invest for the long-term to secure their financial futures. However, before investing in an ETF you need to know how to identify a few key differences between ETFs. These are:
Expense ratio, aka Ongoing Charge
The expense ratio is the cost of the ETF fund manager to administer, distribute and manage the ETF. Often referred to as management expense ratio (MER) or an ongoing charge, the expense ratio can often bee seen within a fund factsheet as a percentage format.
If you invest $10,000.00 into an ETF with a 0.2% expense ratio, you will be paying $20.00/year for the privilege of investing in the fund.
The stock exchange the ETF is listed through
Which stock exchange an ETF is listed on is important to your investment portfolio because you generally want to avoid US stock exchanges as a non US-resident. The reason for this is two-fold.
- Fund managers of ETFs listed on US stock exchanges are required to withhold 30% tax on certain interest and dividend paying investments. It is possible for a non-US resident to apply for a tax reduction if living in an eligible country, but it is easier to simply avoid US based investments.
- U.S. estate tax is applicable to foreign investors with >$60,000.00 invested in US situated assets. If the investor passes away, any invested amounts above $60,000.00 is subject up to probate tax.
ETF share classes
Fund management companies that make and distribute ETFs can offer different share classes within a given ETF. The two most important share class differences you can find in an ETF relate to currency and dividend policy.
Currency
One ETF can, for example, be offered with USD, GBP or EUR share classes. If your investment account with your brokerage is in USD, it wouldn’t be ideal if you invest in the GBP share class. It’s not the end of the world either, but you would do better investing in the USD share class.
Earnings distribution
ETFs can distribute income, interest and dividends through either accumulation or distribution. An accumulation ETF share class is great because any income from the ETF is automatically reinvested into the ETF itself. However, for those that are relying on dividend or other payments to supplement income, you need to invest in the distribution share class.
That is ETF investing 101
It should be clear by now that ETF investing is the way forward for beginner and intermediate investors who know that they need to secure their futures, but don’t necessarily want to put too much effort into investing itself.
Index ETFs are as safe as investing gets due to their inherent diversification. As long as you don’t stray too far away from a “normal” investment portfolio or investment strategy, you should be just fine over the long-term.
Of course, you can still lose money when investing, either through stocks, bonds or ETFs. Market volatility makes it so that no investment is ever safe and you can lose the money you invest. As such it is vital to have your personal finances in order before you dive in. You don’t want to rock the foundation of your financial situation by investing too much, nor do you want to risk your future by investing too little.
If you need help finding the perfect balance, reach out through the button below for a consultation and dive into your financial situation.
