Expected Return ETF VT, VWRL, ACWI, etc

[leonica]

I know past performance is no indicator for future performance.

Everything is assumed in CHF.

Is it more for synthetic funds like ACWIA from UBS since there are no withholding taxes at all?

Despite this, what is a reasonable return to expect for ETFs like VT, VWRL, ACWI tracking ones or even SPI?

I always hear 6% but never the details.

Is this 6% before inflation and without dividend, so around 8% including dividend, as VWRL has around 1.8% of dividend?

Or is the dividend already included in the 6%?

What is the more reasonable assumption? 6% or 8% of return before inflation on average for the next 30-50 years (regarding historical data)?

So after inflation it would be around 4% or 6% (assuming 2% inflation on average)?

 

[tobiahjude99]

@leonica Depends in which currency you measure it. And which kind of taxes you take into account (unrecoverable withholding taxes and dividend taxes)

A solid estimate for long running real return, so after inflation (and average taxes), with VT, I estimate is about 5% in CHF. We are a bit unlucky in that regard with the strong CHF. It does help us buy more shares during accumulation though.

It‘s not a straightforward question to answer, but with 5% real you are probably not far off with your planning.

 

[leonica]

@tobiahjude99 Thanks! So do you also consider inflation to be about 2% on average so it would be about 7% return before inflation?

Sorry for the currency I assume CHF. I agree that we are a bit unlucky on this .

I don't count income taxes for the dividend (so for SPI where everything is recoverable).

So for VT I would have to add around 0.3% in regard to VWRL, since more is recoverable.

So for VT 7.3% before inflation and 7% for VWRL.

For a synthetic fund there are no withholding taxes so someting synthetic like ACWIA from UBS it would also be 7.3% or even 7.6% since VT has also 15% withholding tax and VWRL 30%?

 

[tobiahjude99]

@leonica I calculate with about 8%, 2.5% inflation and CHF appreciation and 0.5% taxes. Just rough numbers.

Trying to get more precise does not really make sense in my opinion.

What do you mean with not counting income taxes? You still have to pay taxes on spi dividends. You can reclaim the 35%, but still need to pay tax on the whole amount.

For synthetic funds, you have swap fees they pay for the derivatives they use. They have only a slight edge of about 0.1% after cost left.
And synthetic funds still have withholding taxes baked into the total return for countries that are not the US.

For VT all withholding taxes for US stocks inside are recoverable L1 (see below) is 0%, L2 is 15%, but you can claim that with DA-1. For ex-US stocks inside it‘s 10-15% L1.

For VWRL L1 on us stocks is 15% and L1 on ex-US ~15%. No L2. And nothing recoverable here on top.

In general the whole topic of withholding taxes is relatively complex. There are different levels and also it‘s different for the stock‘s domicile inside the fund.

Maybe as a start here: https://www.mustachianpost.com/summary-of-swiss-taxes-as-an-investor/

Here the section on multiple levels of withholding taxes.
https://www.bogleheads.org/wiki/Nonresident_alien_investors_and_Ireland_domiciled_ETFs#:~:text=L1TW%20%3D%2010.3%25,same%20as%20used%20for%20VT

A good video on real returns:

 

[leonica]

@tobiahjude99 Thanks for the good and detailed answer!

Yes I know about havin to pay income taxes on dividends but this is very individual depending on the salary of each person, so I wanted to neglect it for this discussion. Personally I count like 20% from the dividends for the income tax.

Yes the topic of withholding taxes seems complex. I have to read more about it.!

Thanks for the links provided!

 

[ferretsharks]

@tobiahjude99 Just here to say that real return is currency-independent. So "5% in CHF" doesn't make sense. We can be unlucky in nominal terms, but we are every bit as lucky in real terms as any other currency.

 

[tobiahjude99]

@ferretsharks That‘s simply not true. Currency appreciation has a big factor on your return, that is relevant for you, as you consume in CHF and are exposed to your local currency mostly.

https://www.bogleheads.org/blog/2020/03/02/50-years-of-investing-in-the-world-part-1/

Switzerland has been particularly affected in the past.

 

[ferretsharks]

@tobiahjude99 I think you should take a look at the Interest Rate Parity : https://en.m.wikipedia.org/wiki/Interest_rate_parity

CHF is a wealth vehicle like any other.
When you say "this apartment brought in an IRR of 7% after inflation", no one is like: "Wait! Is that in Argentinian pesos or Swiss francs? Because it makes a huge difference!" exactly because the apartment is the vehicle itself. It doesn't "need" to compare to any currency.
Let's say said apartment was initially valued 100 baskets of certain goods/services. Its value became 100x1.07[sup]#years[/sup] baskets of the same goods/services (assuming no rents/maintenance costs/shit like that).

 

[tobiahjude99]

@ferretsharks Just as a basic example:

https://www.justetf.com/de/etf-profile.html?isin=IE00B4L5Y983

Put the graph for 5 years in CHF and get a way lower return than in USD. Yes swiss inflation has been lower, but there is still slightly lower return overal with accounting for inflation that happened. Would you have done the same comparison last december would be a way bigger difference.

Using inflation calculator and putting in 2009 numbers https://www.in2013dollars.com/switzerland/inflation, and setting the graph to max., so 2009, gives a return difference of about 44%

Now accounting for the inflation difference of 38,5%, gives about 5% less performance for a swiss investor in CHF over that time frame.

Granted not a huge difference, but it‘s there. And was 5% less just a few months ago.

 

[tobiahjude99]

@ferretsharks You did not read the article.

Currency has a huge effect. Recent study by Scott Cederburg has also shown this.

 

[ferretsharks]

@tobiahjude99 I promise I will.

 

[ariel04]

@leonica Others have commented on the effect on currency. If you want to get the past annualised return for any of the above, you should be able to find it on the websites of their funds

e.g. VT:

https://investor.vanguard.com/investment-products/etfs/profile/vt#performance-fees

They display a before and after tax returns (using many assumptions on taxes). 7.48% per year is their displayed return before taxes since inception.

 

[leonica]

@ariel04 Thanks for the links! I have also seen this, but I am not sure if the 7.48% per year is with or without dividends? So is it more lik 9.5% or 7.48% since inception? Probably tax is quite differennt for every country i.e. CH not having capital gain taxes.

 

[ariel04]

@leonica It mentions it in the footnotes return includes dividends

 

[leonica]

@ariel04 Yes it does. You are correct. Thanks!

 

[primitivebaptist]

@leonica They normally say:
7-8% average performance
5-6% inculding average inflation of 2%
Total performance = always inculdes share growth AND dividends

 

[leonica]

@primitivebaptist Thanks! 7-8% before inflation doesn't sound too bad in contrast to 5-6% before inflation (still better than CH bonds or saving accounts).

 

[primitivebaptist]

@leonica Of course. Therefore there is more risk and volatility. But for a long term investment the way to go.

 

[leonica]

@primitivebaptist Yes, I agree. But my horizon is about 40 years so it should be enough to take the risk and volatility not to matter too much.