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Replacing ETF Portfolio with Stocks/Bonds (for International Tax Reasons)
Old 06-16-2010, 04:12 PM   #1
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Replacing ETF Portfolio with Stocks/Bonds (for International Tax Reasons)

I'd appreciate any suggestions for how to swap my portfolio of ETFs (below) with a sensible similarly-diversified portfolio of stocks and bonds.

US Large Stock-----------------------------15%--------------- VTI
International Large Stock------------------30%--------------- VEU
International Small Value Stock------------9%--------------- VSS
US Small Value Stock-----------------------6%--------------- VBR
US REIT---------------------------------------5%--------------- VNQ
Corporate / Total Bonds------------------- 14%-------------- BND
Inflation-Prot. Bonds/Treasuries/Gilts---- 21%-------------- TIP
(With most of the BND and TIP held in Tax Deferred Accounts.).

[I'm reluctantly doing this because going forward I can't hold USA ETFs or Mutual Funds as their dividends and cap gains will be taxed at my residence in UK at high "income tax" rates (20% or 40%). And even more importantly I would not be able to do "tax loss harvesting" (cap gain losses would not be allowed to offset gains as it would all be regarded as income). The US/UK DTT does not help here BTW.]

- which stocks and bonds should I own?
- how should I pick them?
- how should I rebalance?
- how many holdings are realistic?

My aim is to be as long-term focused and as hands-off as possible.

Thanks for any pointers you can give.

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Old 06-16-2010, 05:54 PM   #2
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The bonds are easy. For TIPS just buy some TIPS. For total bond buy 50/50 treasuries and agency MBS.

For equities, I suppose you could just buy equal amounts of the top 10 companies in each fund.

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Old 06-16-2010, 06:34 PM   #3
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Can you hold CEF's, or will they have same tax issue?
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Old 06-16-2010, 06:47 PM   #4
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If you are in the UK, have you considered ishares and/or some of the funds listed on the LSE?

With direct equities you need to either be prepared to do a lot of research and take the risk that your stock picking skills won't match the market or take the easy option suggested by Brewer12345 and just shut your eyes and buy the top X holdings of each of the funds you would otherwise buy (assuming the portfolio is large enough for you to do this efficiently) - you probably want at least 15-20 stocks to get sufficient diversification and more would be better.
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Old 06-16-2010, 06:50 PM   #5
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perrytime: By CEF do you mean:

Central Fund of Canada Limited (USA) (Public, AMEX:CEF)

If so, I don't think I could hold this without having exactly the same UK tax issues as with USA ETF's.
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Old 06-16-2010, 07:02 PM   #6
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1) Moving my US funds to the UK and investing in UK funds eg. ishares would be problematic I think. I think LSE funds are defined by the IRS as PFICs and would be taxed in the USA as income tax! (exactly the reverse of the "UK tax problem" I am trying to solve.) I'm wary of the higher fees (I think) in the UK as well. I'd welcome more info on any LSE funds/ETFs that would not be regarded as PFICs by the USA. Is there a list? Are currency gains taxable?

2) Buying the Top 10 stocks in each of my 5 ETFs would be OK but that's 50 stock holdings. What do I have to be aware of in self-managing this type of portfolio? I would obviously check annually to see the the top 10 were still the same etc. -- but what else? I may well have to do this so would welcome comments from others in my situation avoiding holding "overseas funds"
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Old 06-16-2010, 09:05 PM   #7
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Tell me what other US ex-pats in the UK do about investing. This problem has got to have been solved many times before.

CEF = closed-end fund, just like ETF = exchange-traded fund
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Old 06-16-2010, 09:25 PM   #8
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You would think this would be a common situation but having spent many hours researching on the internet I am not getting good data or a solution. Hence my questions here and on other forums.

Regarding CEF (closed end funds) - I've just read the definition on Wikipedia but I don't know if they would help from a UK Tax POV. Do you think they would solve the problem of proving that a fund is "distributing" properly?

I would definitely prefer a fund solution over buying 50 stocks. But funds don't seem possible? Also, I just spot checked VTI and its Top 10 stock holdings only cover 17% of the index. So I'm not convinced buying the top 10 stocks would be a suitable proxy for an ETF.

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