Andrew Hallam’s Millionaire Teacher remains one of the best introductions to index investing. When I reviewed it three years ago, I stressed that Andrew writes with authority because he follows his own advice.
In his new book, The Global Expatriate’s Guide to Investing, Andrew shares more of his first-hand knowledge about managing an indexed portfolio outside your home country. Andrew left Canada in 2003 and spent years as a teacher in Singapore before settling (at least for now) in Mexico earlier this year. So he knows all about the challenges—and the surprising benefits—of being an expat investor.
Most of his book’s advice applies equally to homebodies: the first several chapters lay out the case for using a passive strategy, whether with plain-vanilla ETFs, a fundamental index strategy, or the Permanent Portfolio. Then he explains how expats can put these ideas into practice. I asked Andrew to elaborate on some of the key points for Canadians living abroad.
What are the most important tax issues that Canadian expat investors need to be aware of?
AH: So much depends on where the expat is living. Those in jurisdictions where they won’t be charged capital gains taxes can benefit most. Such places include The Isle of Man, Singapore, New Zealand, Hong Kong, Luxembourg, Belize, Egypt (for holding periods exceeding one year), Kenya, Jamaica, Malaysia, Russia, Sierra Leone. The list goes on.
As long as expat Canadians reside in one of these countries, they shouldn’t have to pay capital gains taxes. But there are a few important things to consider. If the account holder buys US-domiciled stocks or ETFs, their heirs may have to pay US estate taxes when the account holder dies, if the value of the assets exceed $60,000 USD. For this reason, expats are better off not investing on US exchanges. They could instead buy ETFs on the Canadian market. Withholding taxes would be 15% on income and dividends, depending on the tax treaty Canada has with the expat’s adopted residence. But those buying Horizons’ swap-based ETFs could sidestep even this tax.
Expats can keep their TFSA and RRSP accounts open while residing overseas. But they can’t contribute to them. The year after I moved overseas, I sold my RRSPs. I paid 25% tax to do it. But when I first invested that money (as a resident) I had received a 40% tax rebate. So selling the RRSP and reinvesting the proceeds in a tax-free account was worth doing.
Is TD Direct Investing International the best brokerage choice for Canadian expats?
AH: Not necessarily. Canadians living in Malaysia or Hong Kong (to name two examples) could invest with Luxembourg-based TD Direct Investing International. But those same investors could also open a Singapore-based account with Saxo Capital Markets, DBS Vickers, or a variety of other brokerages. In fact, DBS Vickers is much less picky about where investors reside: TD Direct Investing International has greater restrictions. They won’t take expats living in Japan, Indonesia, or Bangladesh, for example. And it’s also one of the most expensive international brokerages.
In the book you mention that the cost of buying ETFs in a foreign currency is “negligible.” For Canadians buying US-listed ETFs in discount brokerages here, the cost is actually very high: about 1.5% on smaller amounts. In general, are these spreads lower at brokerages designed for international investors?
AH: Most offshore brokerages are much kinder with respect to foreign currency spreads. But they gouge expats in other areas to make up the difference! One of my brokerages, for example, charges a 0.5% commission on all trades. And it charges a minimum commission of $30 USD. So while they give a better deal on foreign currency spreads (roughly half what Canadians pay) we get smacked with much higher trading commissions.
Some of the offshore brokerages (like Standard Chartered Bank) offer lower trading commissions, but they hammer their investors on foreign exchange spreads. In the end, we either get kicked in the groin or kicked in the teeth.
One “offshore” brokerage, Interactive Brokers, offers some of the tightest currency spreads in the world for retail investors. And they offer low trading commissions. But because the money is held within the U.S. (regardless of which exchange the purchase is made on) there’s always a risk of having to pay U.S. estate taxes upon death, if the account proceeds exceed $60,000.
You recommend using market orders rather than limit orders when buying ETFs. I have always recommended the opposite (as do all the ETF providers) and I discourage people from placing orders when the markets are closed. I recognize this issue may be different for expats in a time zone where the North American markets are never open during their waking hours. Can you share your thoughts?
AH: Technically, you are right to recommend limit orders. And for investors who are emotionally stoic, I recommend limit orders, too. But a limit order, in my view, is a bit like an addictive narcotic. Many investors get excited as they wonder whether their orders have cleared. They might start looking at market prices more often, figuring they can hold out for a better price. They might start getting the jitters when the markets go bump. Many people, I think, underestimate the emotional control required to invest well, year in and year out. In my view, a market order can offset some of the temptation to speculate. And the downside of the extra market order costs are dwarfed by the upside gained from actually matching the market.
How does your status as an expat change your asset allocation decision? For example, if you plan on living outside Canada for many years, does it really make sense to hold all Canadian bonds for your fixed income? And is there any reason for being overweight Canadian equities?
AH: Once an expat moves overseas, their odds of not retiring in Canada actually increase. So yes, it might make sense to go lighter on Canadian bonds and equities. Until recently, I didn’t own a Canadian stock ETF for that reason. Why overweight a geographic sector that may not become my future home country? Incidentally, I added some Canadian equities recently because the Canadian stock market was lagging global markets. Plus, I was able to buy a Horizons swap-based ETF. As an expat in Singapore, I wouldn’t have paid capital gains taxes or dividend taxes on such a product.
Can you share your own asset mix and the process you used to make that decision?
AH: Roughly 40 percent of my money is in Canadian bonds. It’s split between the Vanguard Canadian Short-Term Bond (VSB) and Horizons Canadian Select Universe Bond (HBB). The Horizons ETF is swap-based. Because my account is domiciled in Singapore, I won’t have to pay capital gains taxes on this product, and there is no interest income. I split my fixed income between the two because I recognize the added third-party risk of owning a swap-based ETF. The rest of my money is split evenly between Vanguard’s FTSE Developed ex North America (VDU), Horizons S&P 500 (HXS), and Horizons S&P/TSX 60 (HXT).