How I Decided

Why ETFs

Firstly a little about ETFs (exchange traded funds). These are essentially funds that bundle a large number of individual stocks, commodities and / or bonds under one fund. This allows you to easily track the trend of the whole stock market with only a handful of ETFs. This makes it easy for passive/lazy investing over longer terms. ETFs also offer low expense ratios and fewer broker commissions than buying the stocks individually. Historically since the inception of the stock market returns have averaged 9-11%. By having a well diversified range of ETFs you can also achieve these levels of returns with little effort.

Even though Irish domiciled ETFs are heavily taxed in Ireland (41% tax on both gains and dividends), I am still happy to continue investing in ETFs after weighing the pros and cons outlined in this post. This may change as I discover more tax efficient/higher performing options but this is where I’m at for now. My main reason for continuing with ETFs over pensions is that I plan to be FI at least 5 years sooner than I could access an executive pension.

Please consider the pros and cons in the previous post and do your own research before investing any sums of money. What works for me and my goals may differ largely from your own situation.

Why not one simple ETF

After reading many blog posts about portfolio options I settled with a variation to the Escape Artists suggestion explained here. Some bloggers suggest a very simple portfolio where you just chuck whatever money you have, whenever you have any extra, into one Global ETF fund like the Vanguard All-World fund (VWRL) but the reason I decided against that approach is because that fund is heavily invested in US equities (55%) and I wanted something that was a bit more diversified.

According to the Escape Artist, US equities may be overpriced at the moment which may doom long-term investors to under-performance. For example: when you buy high you need to make massive gains to make up the same returns you would have gotten if you had bought low and made smaller gains.

Why 100% stocks and no bonds

Depending on your risk tolerance you may want to put a portion (say 30% or 40% for more conservative or 90% for less conservative) of your portfolio into bonds as these have less risk and lower returns but as I have time on my side to let my investments rebound from any downfalls, I decided not to keep any of my portfolio as cash or in bonds. I’m open to the higher risk of a 100% stock portfolio which may not suit most investors.

The case for holding bonds

That said: I’ve since read an argument for holding at least 10% bonds in your portfolio and that is so that you can sell bonds at a high and buy stocks “on sale” during a downturn.

A part of investing is deciding what asset allocations you are comfortable with. Depending on how those assets perform over the year you may need to rebalance your portfolio to ensure that you maintain those allocations.

For example: You have 60% of your portfolio in an S&P 500 ETF and 40% in an emerging market ETF – during the year the emerging markets ETF out performs the S&P 500 and now your asset allocation is 50%/50%. You will need to sell some of the emerging market ETFs and purchase some more S&P 500 ETFs to rebalance back to the 60/40 split.

If you hold bonds as well as stocks, a crash may be a good time to rebalance as during a crash, money flows out of stocks (risky) and into bonds (safer), this devalues stocks and increases the value of bonds. So if you hold bonds a crash would be a good time to sell (high) and buy stocks (low) and rebalance your portfolio to your desired split. This means that once the market recovers you will own more stocks which you got “on sale” and will benefit more from the upswing in the market. If you don’t own any bonds you will simply need to wait for the market to recover (usually 2 years).

This is why it’s important to hold at least some bonds as you will be in a stronger position to benefit from market recovery than if you only held stocks.

Once I’m back to work I think I will start buying some bonds just for this purpose.

Who is this for?

As I’m currently invested in 100% stocks, this portfolio mix is probably for people very early in their investment journey who have many years of contributions ahead of them before they are able to retire.

Once you are about 5 years away from retirement you’d probably want to invest in something like 30% or 40% bonds and 60% or 70% stocks with higher yields/dividends rather than higher returns.

Portfolio Make-up

Below is the make-up of my current Irish ETF portfolio. All these ETFs are with the Vanguard company (See more about them below). 47% is in an all-world fund (split between distributing and accumulating), 22% in Developed Europe, 12% in Emerging Markets and 18% in the S&P 500. These funds all have varying management fees but this make-up comes to a weighted MER (annual fee) of 0.18% with an estimated weighted return of 4.10% based on each funds’ returns since inception and 2.97% in dividends. That’s excluding taxes and inflation.

And in chart form…

About Vanguard

I like Vanguard because their core purpose is “to take a stand for all investors, to treat them fairly, and to give them the best chance for investment success”, their average expense ratio is 0.10% as per 2018 assets under management. As per their website: “Vanguard is owned by its funds, which in turn are owned by their shareholders. Vanguard’s ownership structure means we have no conflicting loyalties. It’s in everyone’s interests—our clients’ and thus ours—to uphold the highest ethical standards every day. When making decisions, we are guided by a simple statement: ‘Do the right thing.'”

ETFs in Detail

Each ETF comes with a fact sheet which you can download from Vanguard’s website.

Fact sheets tell you things like:

• The fund inception date
• Total assets invested in the fund
• Exchange tickers for different stock exchanges
• Base currency (for example you may buy an ETF in EUR but the stocks base currency is USD. Your dividends will be paid our in USD and converted to EUR by the broker)
• Whether the dividends are accumulating (automatically reinvested) or distributed (paid out each quarter)
• What frequency the dividends are paid out (Monthly, Quarterly, Annually)
• Ongoing management fees
• Performance benchmarks and historical performance
• Number of stocks held within the fund
• Dividend yield (%) – the percentage that will be paid out. Usually high yield dividends have lower gains and vice versa. In your accumulation phase it’s probably preferable to have lower dividends and higher gains. Getting dividends also triggers taxable events which need to be reported and paid annually.
• Top 10 holdings (companies)
• Sector breakdown ie: what percentage of the fund is invested in Financials, Technology, Utilities, Health Care etc
• Market allocation ie: Which countries are the companies located in whose stocks make up the fund

Below are the highlights of my portfolio make-up so you can get a sense of the range of companies I’m invested in.

FTSE All-World High Dividend Yield UCITS ETF (VHYL) – 24% of portfolio

This fund is invested in over 1,500 company’s stocks. Below you can see the top 10 company’s this is invested in. The top 10 make up 13.6% of the funds assets.

All, bar 1 of my current portfolio ETFs are distributing. This fund pays dividends quarterly at a rate of 4.1%.

Here is the sector make-up.

And here is the country make-up.

FTSE All-World UCITS ETF (VWCE) – 23% of portfolio

This fund is invested in over 3,500 company’s stocks. Below you can see the top 10 companies this is invested in. The top 10 make up 15.4% of the funds assets.

Once I discovered accumulating funds I started putting any new contributions in accumulating versions. This fund pays dividends quarterly at a rate of 2.3%.

Here is the sector make-up

Here is the country make-up

FTSE Developed Europe UCITS ETF (VEUR) – 22% of portfolio

This is a much smaller spread with investments in just over 600 companies where the top 10 listed make up 20.8% of the fund.

This fund pays dividends quarterly at a rate of 3.4%.

Here is the sector make-up.

And the market allocation.

S&P 500 UCITS ETF (VUSA) – 18% of portfolio

This one is made up of 503 companies (hence S&P 500) where the top 10 make up 28.1% of the fund.

This fund pays dividends quarterly at a rate of 1.7%.

And here are the sectors:

The market allocation is 100% US Companies which is the nature of the S&P 500.

FTSE Emerging Markets UCITS ETF (VFEM) – 12% of portfolio

This one has stocks in over 1,800 companies with the top 10 making up 22.6% of the fund.

This fund pays dividends quarterly at a rate of 3.1%.

Here is the sector make up

And the market allocation:

Performance

To give you an idea of the volatility you should expect and be prepared for, here is how this portfolio has fared so far:

Purchased: about 15,000€ worth in May 2019 + 5,000€ in Jan 2022

As you can see, shortly after I purchased, the markets dipped. My portfolio dipped to minus 5.3% then. Even though I plan to invest for the long term, it’s very hard to stay invested when you see your money disappearing!

I stuck with it though and in January 2020 my portfolio was up by 10.57%.

Roll on COVID and at one stage I was down 30%. A month later that crawled back up to only an 11% “loss” but it was a very hard time to trust in the historical trends.

By Feb 2021 my portfolio was back up 13% overall which amounts to an annualised average return of 7.8% before tax.

Now, in October 2022, my portfolio is still up 14.82% overall but the annualised returns have almost halved since 2021 BUT my dividends have gone up from 2.32% to closer to 3%. While this doesn’t seem like much of an increase, once you have higher values invested it makes a bigger difference. For example, Right now I have about 23k in this account. 2.32% gives me 533€/year in dividends while 3% gives me 690€, a difference of 157€. If I had 100k invested it would make a difference of 678€ and if I had 1 million invested it would make a difference of 6,800€ (over 2 months of living expenses per year).

How to buy

I’ve had a few comments asking where to buy Vanguard ETFs in Ireland. You can read much more detail about how to invest and maintain investments in Ireland in this post but for a quick answer I personally use Degiro* as my online broker. Other online brokers are Interactive brokers and Trading212 if you want to check them out.

Degiro offer free commission trades on some ETFs.

Vanguard S&P 500 is one and Vanguard All World is another.

The Vanguard All World differs from the high yield world fund I am in so I must weigh up the fees and performance of these and may switch.

Here is the full list of commission-free ETFs.

You get one free trade per free share listed per calendar month.

If you are trying to copy my portfolio you don’t need to worry about timing as all the free ETFs can be purchased in the same month and the others have commission so it doesn’t matter when you buy them.

I buy the Amsterdam market ETFs as they are in Euro and not subject to currency exchange fluctuations. That said, all of my dividends except VEUR are paid out in USD and converted to EUR. This means you will still have some currency exchange exposure if you want to consideration this for your own portfolio.

Degiro have an app as well which is quite good.

As per usual, don’t invest any money you can’t live without. All investments come with risk of loss.

Updates

Based on reader feedback (thank you), I will likely be shifting this portfolio a little bit. There are ETF funds called accumulating funds which automatically reinvest any dividends into those funds.

If you don’t need the dividends right now, accumulating funds will benefit from a bigger compounding effect as you will not need to pay taxes on those dividends until the 8 year deemed disposal. Otherwise you need to pay 41% exit tax on dividends in the year you receive them even if you reinvest them.

For example I received dividends in 2019 and even though my portfolio was at a 30% loss overall at the time including the reinvested dividends I still needed to pay 300€ in tax on the dividends. That is a hard pill to swallow.

One fund I will likely be switching is the All World High Dividend (VHYL). I will be switching to VWCE which is the closest equivalent accumulating fund with lower fees. The fees are 0.22% instead of 0.29% and higher 5 year returns 6.65% instead of 6.35%, full fact sheet here. That said it’s a much higher price point (79€ per share instead of 49€) so my position will be weaker. I’ll also need to pay taxes on my gains by swapping so need to take all that into consideration.

Another reader kindly researched the other accumulating fund equivalents. I had a look at the fact sheets and they are exactly the same with the exception that one pays out dividends and the other doesn’t. Same stocks, same companies, same allocation, same fees etc.

Here is how they map out:

Here is some more information on fund examples with accumulating vs distributing ETFs if you want to read further.

Free ETF Comparison

Yet another reader pointed out that the trading platform Trading212 has VWCE as a commission free ETF. I don’t know much about that platform and haven’t figured out if there are any downsides to having funds in different platforms.

Only thing I can think of off the top of my head is it might make it harder to balance your portfolio if you need to extract money from one and move it to the other. Also harder for you to see overall losses or gains and possibly harder to compile gains for deemed disposals and other tax reporting etc.

So in terms of free ETFs in my current portfolio VWRL and VUSA are free in Degiro, VWCE is free in Trading212 but Trading212 does not seem to have the other accumulating ETFs listed above available to purchase. None of the accumulating funds I’ve listed are free in Degiro as it stands. These are recently created funds so that’s not to say Degiro won’t add some eventually.

I still think I will switch from distributing to accumulating even though they aren’t free to purchase as the money I’ll make in compounding by not having to pay taxes on dividends until year 8 will outweigh the cost of buying them once a month or once every 2 months.

Would love to hear your feedback or if you have anything else to add that other’s might benefit from do let me know and I’ll update the post.

Although this was one of the simplest posts to put together compared to some of my more extensive articles, this one seems to be one of the most popular so the more I can add that would be of use, the better for the wider audience.

* This post contains referral link where I get a bonus if you sign up at no cost to you. All investment carries a risk of loss. Do not invest any money you can’t afford to lose.

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