Strategy for those unable to invest in ETF's/Mutual Funds

[deedae]

So, I'm a US Citizen living in the UK who recently opened up a Charles Schwab One International Account.

As I'm non-resident in the US, Schwab won't allow me to invest in US-based ETF's or Mutual Funds. As far as I'm aware no brokerage will allow me to do so as a UK resident - I also don't keep a US address - my spouse (a UK citizen) and I live in the UK and aren't making any plans to move to the US in the foreseeable future. So it looks like it's just individual stocks for me.

I'm in my 30s, am new to investing and was originally hoping to hold about >75% of my portfolio in an index like the S&P 500 and just let it roll, but as I'm unable to do that, what's a decent strategy? Obviously, I can't just purchase all 500 stocks of that index, but I do want some diversification. Would diversifying into 20 different stocks that I believe have good fundamentals be too much/too time consuming? Would I be better off with around 10 stocks and to grow from there?

I've got around $25k that I'd like to invest - and I'd say that I'm willing to take on a decent amount of risk, being in my 30s, and could leave the money in the market for quite some time. I'd also say that I have some spare time to devote to it, maybe 5-6 hours a week but certainly don't have enough time to be for this to be a second job.

I should also say that I'm self employed here in the UK, so I don't have a traditional work-related retirement account (a pension), so looking at self-investing to help save for retirement.

Any advice for how best to diversify my portfolio would be greatly appreciated!

 

[quasar92]

@deedae I'm also a US citizen living in the UK, so I feel your pain. A few options worth considering:

1. In a UK SIPP, you should be fine holding mutual funds. This is the obvious account to use as your core investment. There are some tax treaty questions about ensuring it's a) a pension and b) preferably not a foreign grantor trust - different opinions abound on these. Personally, I'm pretty convinced it is a "pension" under the tax treaty, but the foreign grantor trust one is kind of up in the air (if it is one, you have to file forms 3520 & 3520A with your US tax return, and those are a bit of a bear).
2. You can also use a US Roth IRA opened using your US SSN and UK address - won't be able to get all your $25k in at once with the $6k annual limit, but it helps. Probably only can use Interactive Brokers and maybe Schwab International, and you'd buy EU (UCITS) ETFs. Yes, they're PFICs, but because they're in the IRA they're ok.
3. Pseudo-indexing in individual stocks - probably start with a UK ISA, since you may as well use those tax advantages when your only other option is a taxable brokerage account. Some guidance: https://www.bogleheads.org/wiki/Passively_managing_individual_stocks
4. Buy options on US ETFs and exercise them, so you can then get assigned the actual stocks
5. Become an accredited investor - need a lot more than $25k, more like €500k and a history of trading or employment in finance.

Those are super high level, with lots of caveats and nuance!

 

[adiel]

@quasar92 The “buy options” option is ingenious. Are there brokers that let you buy US ETF options within an ISA?

 

[quasar92]

@adiel And will also open an account for a US citizen? Not that I know of, but I would very much welcome the news if there are!

Need Interactive Brokers to offer an ISA, really.

 

[rhemajoy]

@deedae Hey there. So just as a disclosure, we're a startup based in Barcelona creating a wealth-building platform for people living abroad.

We're also co-founded by US expats so we know exactly the problem you're having.

In short, your best bet is to do what you proposed: take sample of stocks from the S&P 500 and try to mimic its performance.

This practice is called "direct indexing" which enables you to invest in an index by buying all or some of its components.

There are some advantages to this method as it lets you do what's known as tax-loss harvesting.

Here, you can offset capital gains by selling individual stocks that lose value since you get the tax credit for the loss.

That said, you'd need to periodically manage your portfolio which is time-consuming, and, depending on your broker, costly.

That said, you would only want to re-balance your portfolio (tax-loss harvest) a few times a year. There's no point doing it on a daily or weekly basis.

We're planning on offering our services to US citizens abroad, but as you know, it's really f-ing complicated to invest as an American expat. If you're interested, you can sign up on our early-access list and we'll send you an invite once we're ready to help Americans abroad.

Hope this info helps; I know it's far from ideal (thank you FATCA and CBT) but it's better than nothing.

 

[lemonbalm]

@deedae Can you use Interactive Brokers in the UK? I'm a US citizen living in Canada where as you can imagine, there are a lot of dual US citizens. This seems to be one of the ones people like on the Canadian finance subreddits.

The other option that may or may not exist: I can buy US-listed ETFs through Canadian brokerages in USD (which is compliant with US rules), so maybe that's an option through a UK brokerage?

 

[genenco]

@lemonbalm Idk if it’s the same issue in the UK anymore, but IB doesn’t sell US-domiciled ETFs to anyone in the EU based on European regulations.

 

[quasar92]

@genenco It's still an issue in the UK - that EU rule got copied into UK law. The UK could change it, but no sign yet that they actually will.

 

[frankieberg1985]

@deedae look for other brokerage companies. as one said interactive brokers is another one that takes US expats.band there might be a few others that are top brokerage houses.

by the way i was like you an expat for 10 years and schwab served me for 10 years with no issues but i read recently that they stopped this service for UK residents.

there’s no similar alternative that gets close to the benefits of investing in ETFs. what you propose of buying individual stocks won’t practically work . what if Apple goes up 5% this week? you’d have to rebalance a portfolio of 500 stocks? how often are you going to do that and how long does it take? and what’s the tax implications of selling Apple ? imagine movement of sectors…. it will greatly impact your portfolio as it moves away from tracking the s&p. an etf is doing that for you automatically every day. in addition, s&p while a good start is not the optimal allocation. as you learn more about investing you’ll realize that you’d want diversification into international , small cap , and REIT etf indices as well. (for example if you are into diversified market growth) or bonds and gold etfs (if you find yourself one day in need of more diversification due to a personal situation).

the only reason schwab and others are not offering this service is because it’s not profitable to them. there are too few US living in the UK and the cost of “special reporting” required outweighs the benefits for schwab…

so shop around for international brokers and you’ll find an alternative. the initial effort to find and set up an new account maybe tedious but it will pay off in the long term .

 

[qurious4christ]

@deedae Do NOT buy mutual funds based out of a country other than the US, or you will end up running into punitive taxation because the IRS views them as PFICs. Seriously, you are in for a world of hurt if you do this. I'm not sure if ETFs also qualify as PFICs. You'd be better off buying stocks, especially if you are ok with some risk.

Not only is the taxation on PFICs punitive (if you hold them long enough it can wipe out any gain you've made), but the process of filing the paperwork required each year is beyond onerous.

 

[quasar92]

@qurious4christ ETFs are definitely PFICs, along with mutual funds, investment trusts, REITs, etc. Some individual companies arguably are too, that's where it gets pretty opaque (75%+ of income being passive or 50%+ of assets are passive).

 

[jasmin0791]

@deedae I've thought about doing some direct indexing too (for the same reason; US citizen in Germany). I was considering partially replicating the Global Wellington fund. My logic is that if you can only buy a limited number of stocks, then value blue chips (what the Wellington targets) are probably a good choice for buying and holding. It's an actively managed fund, but the turn-over is low.

 

[hesta]

@jasmin0791 Are you able to use Alpaca Markets?

https://alpaca.markets/learn/live-trading-account-non-us/

If so... there are some direct indexing tools you can run on top of this broker. This way you could copy an ETFs more-or-less automatically.

 

[leafar]

@deedae If I move to the UK does Schwab make me swap my current investments?

Was thinking of switching to them for an upcoming move, but maybe I had old information about them being a good option.

 

[resjudicata]

@deedae If you’re living in the UK, give these guys a look:

https://www.fundsmith.co.uk

Really no nonsense approach and great history of returns.

 

[quasar92]

@resjudicata Looks like everything they offer would be a PFIC, so pretty toxic for US citizens.

 

[resjudicata]

@quasar92 Ah you’re right, I spaced on that part. Sorry for the misdirect!

 

[whitesunshinee]

@deedae There will be a lot of complications, however, there are some good options in here for you.

If you can invest in an ISA then I would suggest a Stocks and Shares ISA rather than a LISA because if something goes wrong you can get money out easier.

With the SIPP - Is something I agree with, if you can do it, you get a tax free allowance as a UK citizen, unsure if that works for US citizens. Teh only thing to think of is that you can't access the money.

Finally, the less popular option is to gift your partner the money if you are serious and put it in her name (assuming she is UK citizen) and then put that into an ISA where it can have better freedom and tax efficiency.