5 Reasons ETFs are the best investments for UK Expats
Not long ago, investments for UK expats needed came with a health warning.
Thankfully, the days when your best choice was locking up your money for god knows how long in god knows what for an insanely high fee have been consigned to history.
So too have the days when the only people who would talk finance to expats were unscrupulous crooks dressed in expensive suits.
OK, they weren’t all like that, but even the good ones had a habit of pushing overpriced low quality international services that were more likely to loose money than make any.
Expatriates across the globe can enjoy a unanimous sigh of relief.
Nowadays, the best investments for UK expats are comparable to what you’d get in you still lived in the UK. (If not better depending on where you live).
Let me explain:
Index funds and ETFs
Nowadays you can easily invest from wherever you are using the method recommended by Warren Buffett (the king of investing and Chair/CEO of Berkshire Hathaway), John Bogle (the founder of Vanguard), Burton Malkiel (economist and author), David Swensen (CIO of Yale) and a whole host of financial industry titans.
It’s the method that puts the odds of success firmly in your favour. It’s a method backed up by the best research.
And most importantly those same studies have shown time and again that when you use this method you end up getting better investment returns than nearly everybody else out there (including the pros!).
Over the 10-year period ending June 2023, 98% of funds underperformed the S&P Global 1200® index
And the best new is, it’s a method that couldn’t be simpler. You don’t have to spend your days researching companies. You don’t even have to spend your weekends researching which fund managers to choose.
Instead, all you have to do is buy a couple of funds and add money whenever you have some spare. It’s really that easy.
Game changing
And the thing is, once upon a time this type of investing wasn’t available to non-residents, but that’s no longer the case.
These days ETFs have changed the game for anybody anywhere, including British expats. That’s because, as the name suggests, Exchange Traded Funds are simply funds that can be bought and sold on stock exchanges.
That’s important for us because just about anybody can open an investment account that lets you buy ETFs no matter who they are or where they are in the world.
Just to be clear, there are lots of different kinds of ETF available right now. We are talking about the globally diversified index tracker variety. (Examples being: iShares MSCI ACWI ETF & Vanguard FTSE All-World UCITS ETF).
You can read a lot more about ETFs here if you are interested.
However, the headline is:
ETFs make perfect investments for expats
Here are 5 reasons why they are great for us.
- Broad Diversification
- Low Costs
- Superior Investment Returns
- Easy Access
- Reduced Workload
Diversification
ETFs are provide broad diversification.
Trying to pick shares in winning companies is like looking for a needle in a haystack, but there is a way to guarantee ownership of the companies that win. As investment gurus, Jack Bogle and Burton Malkiel would say: “just buy the haystack.”
Buy the Haystack
Bogle & Malkiel
If you own all the shares of all the companies you automatically own all the winners. I know what you are thinking. But won’t you own all the losers too? And though the answer is yes, would you believe me if I said it doesn’t matter?
Let’s say 24 years ago you decided to invest some money for retirement. You had £10,000 to invest and you shared it equally between 10 companies. Unfortunately for you, 9 of those companies went bankrupt and you lost 9 of your £10K.
Not all was lost however. One of your companies survived and that company was Amazon.
And luckily for you that bit of your investment is all that matters.
Why winners more than make up for losers
If you invest in a broad globally diversified ETF you’ll have shares in all the companies. Yes, more of your money will be wasted on rubbish, but at the same time, some of your money will be allocated to wonderful companies that will more than make up for the duds. Think Apple, Facebook, Microsoft, Starbucks and Hilton to name but a few.
And just in case you feel a sense of bravado coming over you, nobody knew what lay in store for Amazon 24 years ago. Even if you could see a future for the company, there was no way to know how successful buying Amazon shares was actually going to be. There are plenty of amazing companies out there that more than fulfill their potential without having such an increase in their share price.
By the way, most people who did pick Amazon in the beginning sold it on the way up. Many actually lost money selling it after one of its many mega share price drops.
It’s a lot easier to put your money into the global stock market when it drops, than an individual company.
Individual companies don’t always recover, but the global stock market always has.
Low cost
Most people in the UK opt for actively managed funds or investment trusts. These are funds that are usually managed by a professional.
I won’t talk about the fact that there’s a tonne of evidence that show professionals totally underperform index trackers (see Superior Investment Returns below for that).
I won’t even mention the fact that some of these require entry fees and the like that would make your cost savings with index trackers even higher.
Instead, I’ll be more than fair and concentrate on the one type of fee that is attached to all funds no matter the type or where you buy it and that’s the Ongoing Charges Figure (OCF).
These are taken as a percentage of your assets under management annually (how much money you have invested). According to Which actively managed funds and investment trusts have ongoing charges of between 0.75% and 1.8%.
Why one percent matters
On the face of it 1.8% doesn’t sound like much, but compare that to 0.22%.
That’s the OCF for Vanguard FTSE All World UCITS ETF, which is a popular global fund that expats often go for.
Let’s, for the sake of argument, say you invested £10K in a global fund 24 years ago for your retirement which commences today. And let’s also say your investments grew at an annual compound interest rate of 10%. (which isn’t far off what they would have done).
If your OCF was 1.8% you’d now have just over £66K. You’d have multiplied you money big time without really doing anything other than leaving it alone. That’s a nice trick in anybody’s book. You would be right to be pleased with yourself.
That is unless you crunch the numbers and see what you would have had if your OCF was 0.22%.
Using the same numbers but with an OCF of 0.22% you’d now have just about £94K.
In other words. Fees matter. Even low ones.
Tax efficiency
I’m lumping tax efficiency in with low cost because at the end of the day paying no or low tax just means saving money.
ETFs are tax efficient. For any anybody interested in how exactly they do save on taxes we’ve covered it in a bit more detail here.
For the rest of us, just know, some jiggery pokery under the hood makes ETFs one of the most tax efficient ways to invest out there.
Superior Investment Returns
ETFs that track an indices give you superior investment returns.
As already touched on above, picking the shares of individual companies is notoriously difficult to do. Can it even be done? There’s a highly respected school of thought that says it can’t and that people who do manage to do it are just lucky.
Now that seems like a pretty outlandish statement, even though it is backed up with some serious research and academic clout, but no matter whether you agree or not, it is without question that most pros underperform index funds and index tracking ETFs. (If you don’t believe me, I say again, take a trip over to SPIVA).
Over 10 years, 85% of funds underperformed an index and as that time period increases so does the percentage of underperformers. Once you get into 20 years or more you are looking at 90% of funds underperforming indexes. That means by opting for an index tracker are you are looking at placing yourself within the top 10% of all investors everywhere.
And remember you hardly had to do anything for those returns (see below).
Reduced Workload
ETFs hardly require any input from you. No company research required. No complex spread sheets needed. No expensive software applications necessary.
Just leave all that hard graft and expense to the 90% that you beat when you take the low cost broadly diversified index tracking approach.
All you need to do is add money whenever you have some spare and you are good to go.
Easy Access
If you lived in the UK and decided to invest, chances are you’d put your money to work in an OEIC. These Open Ended Investment Companies are the go to for Brits who live at home.
The bad news is. Expats don’t usually have access to them. The good news is. That might not be such a bad thing.
As Bill Vasilieff writes in the FT:
The UK experience is advisers remain rooted to the traditional unit trust and OEIC alternatives, despite the poor track records of actively managed funds, which continually fail to beat their benchmarks.
Incidentally Bill is talking about the Virtues of ETFs compared with Oeics because he agrees they are better. And the good news is we expats have easy access to them.
Whereas lots of different kinds of funds are inaccessible to people living overseas, these types of funds are available to anyone.
All you need to do is open a brokerage account, choose an ETF to invest in and add money whenever you have it. It couldn’t be simpler.
