Thun Financial Advisors Research ©| 201χ 1

Thun Financial Advisors Research 2017

Thun Financial Advisors, L.L.C.

is a U.S.-based, fee-only, Regis-

tered Investment Advisor that

provides investment manage-

ment and financial planning

services to Americans residing

in the U.S. and overseas.

We maximize long-term

wealth accumulation for our

clients by combining an index

allocation investment model

with strategic tax, currency,

retirement and estate plan-

ning. We guard our clients’

wealth as though it was our

own by emphasizing prudent

diversification with a focus on

wealth preservation and

growth.

ETFs as an Investment

Planning Tool for Americans

Abroad

ETFs as Investment and Planning Tool for Americans Abroad

This article provides an overview of why ETFs are a cru-

cial planning and investing tool for Americans abroad.

Explains and describes ETFs in comparison with mutu-

al funds

Identifies the advantages of ETFs over mutual funds in

terms of lower costs, tax efficiency and precise asset

allocation

Analyzes the advantage of these functions in building

appropriate and efficient investment portfolios for U.S.

expats

Introduction: ETFs and the Expat Investor

Increasingly, Americans abroad are being locked out of financial ser-

vices: U.S. mutual fund providers are restricting fund access and U.S.

brokers are closing their accounts. The result is often frustration and

confusion for those affected. However, the disruption can often be-

come an opportunity for expats to review their investment strategies

Thun Financial Advisors 3330 University Ave. Suite 202 Madison WI 53705 www.thunfinancial.com Skype: thunfinancial

Thun Financial Advisors Research ©| 201χ 2

and advisor relationships in light of the broader

changes taking place with respect to cross-border

taxation and compliance (see “Why U.S. Accounts

of Americans Abroad Are Being Closed”).

This new environment may often seem over-

whelmingly complex. However, financial innova-

tions such as Exchange Traded Funds (ETFs) can

facilitate implementation of a superior investment

approach than was traditionally available to expat

investors. As described below, ETFs provide cost,

tax and diversification advantages, while solving

planning and compliance issues unique to expats.

What is an ETF?

An ETF is an “Exchange Traded Fund” and is simi-

lar to a mutual fund: essentially it allows the in-

vestor to hold a diversified selection of stocks or

bonds in a single investment. However, whereas

mutual funds price once a day, ETFs trade on an

exchange and are continuously priced and re-

priced throughout the day. Generally, an ETF’s

holdings (like an index fund’s) are tied to the com-

position of an index such as the S&P 500 Index

(U.S. large capitalization stocks), the MSCI Europe

Index (European stocks) or the Barclays Aggre-

gate Bond Index (U.S. bonds). Most mutual funds,

in contrast, hold securities selected by fund man-

agers. For this reason and others, the ETF struc-

ture provides many efficiencies compared to mu-

tual funds.

Cost Efficiency

The first of these is cost efficiency. Mutual funds

are generally managed by teams of highly com-

pensated fund managers with responsibility for

picking investments. ETFs, in contrast, mimic the

holdings of their corresponding index without em-

ploying an expensive management team. Further-

more, mutual funds tend to turnover their hold-

ings frequently, incurring substantial trading

costs. ETFs are generally much more stable as the

underlying index changes infrequently. Conse-

quently, ETFs have lower turnover and signifi-

cantly lower trading expenses. Based on a re-

search paper by Edelen, Evans and Kadlec cited in

Forbes, management and trading expenses con-

sume 2.4% of the average mutual fund value an-

nually. Over time, these high fees exert a huge

drag on mutual fund performance. In contrast, the

typical ETF has management fees of between

0.05% and 0.4% annually. The net result is that

ETFs outperform traditional mutual funds over

time.

Tax Efficiency

The typical mutual fund will, during the course of

the year, make several types of distributions—

short term capital gains, long term capital gains

and dividends or payments from the underlying

holdings. Because mutual fund active manage-

ment strategies tend to result in heavy trading and

constant turnover within the funds’ portfolios,

capital gains are constantly being realized rather

than accumulated and deferred. Due to the legal

What is an Index?

Most ETFs are built to track an index. A stock

market index is a group of the stocks of com-

panies, and the value of those shares com-

bined (according to a mathematical formula)

is the value of an index. The most well–

known indices, the Dow Jones Industrial Av-

erage and the S & P 500, feature holdings

such as Apple, Walt Disney and Nike. Conse-

quently, an ETF investor will also hold shares

in these companies.

Thun Financial Advisors Research ©| 201χ 3

and tax structure of mutual funds, these realized

gains must be passed through to the underlying

shareholders annually. The result is frequent tax-

able distributions and fewer deferred gains for the

investor. This tax inefficiency is compounded for

U.S. expats if they live in local jurisdictions with

high tax rates.

ETFs generally avoid the tax inefficiencies of mu-

tual funds described above. Because they have

very little annual turnover, an ETF’s taxable distri-

butions are generally limited to dividends and in-

terest. Capital gains are not realized and the capi-

tal gains tax is deferred. As a result, the investor,

not the fund manager, chooses the timing of the

realization of capital gains. This provides the indi-

vidual investor flexibility to manage her tax liabili-

ties effectively.

Furthermore, an ETF portfolio lends itself to effec-

tive tax loss selling. In a portfolio holding single-

asset class ETFs, tax loss selling opportunities

arise through the normal variation of asset class

returns. Gains and losses are not cancelled out as

in multi-asset class mutual funds. These charac-

teristics make ETFs more tax efficient and can re-

sult in substantially increased after-tax wealth ac-

cumulation.

Global Tax Efficiency

Beyond the ability to control when capital gains

are realized, ETFs often escape common cross-

border investment traps encountered by Ameri-

cans around the world. For example, in certain

countries, U.S. mutual funds will be subject to pu-

nitive taxation as off-shore or “non-transparent”

investments. In contrast, ETFs may be afforded

optimal tax treatment because they are traded on

an exchange. An additional example is the UK,

where U.S. investors must avoid holding so-called

“non-reporting” funds. Unfortunately, few U.S.

funds qualify as reporting funds. However, sever-

al ETFs are reporting funds and the best U.S. listed

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UK “reporting funds” are all ETFs (see Thun’s arti-

cle “Americans in the UK Need to Avoid this Catch-

22 Investment Trap”).

ETFs and Efficient Expat Portfolios

Financial advisors have stressed diversification to

investors for many years (see Thun Financial’s

“Tracking the Benefit of Diversification through

the Lost Decade of 2000-2009”). However, many

portfolios are not properly balanced: they hold too

much cash, too much stock (or too many bonds),

or too much in U.S. domestic securites ETFs take a

giant step towards providing diversification by

providing low-cost access to all of these fund cate-

gories through U.S. markets. In addition to do-

mestic stocks and bonds, ETFs provide access to

international stocks, bonds and alternative invest-

ments, including global real estate and commodi-

ties.

Achieving global diversification is also important

to expats for planning purposes. American expats

frequently change jobs and countries of residence.

Therefore, they are exposed to a variety of coun-

tries and currencies. A fundamental principle of

cross-border currency planning is that some mon-

ey for future expenses should be held in the same

currency as those expenses (see Thun Research’s

“Managing Currency Risks as an American

Abroad: In What Currency Should I Save and In-

vest”). However, because many Americans are un-

sure of where they will be in several years, they

require a globally diversified portfolio with expo-

sure to many currencies. The wide variety of ETFs

allow investors to efficiently and precisely diversi-

fy their portfolio in terms of geography and cur-

rency.

Americans with more fixed long term plans should

also incorporate currency planning into their in-

vestment strategy. For instance, Americans who

plan to stay abroad after they have finished work-

ing will want to hold some funds in the currency

of their country of retirement. Even Americans

who plan to return to the United States may still

have particular currency-related estate planning

issues: for example, children who’ve stayed in the

adopted country. In these situations, mutual

funds can fail to deliver the necessary currency

exposure: frequently, mutual fund managers will

perform currency hedging, or betting on currency

fluctuations, to increase returns. This currency

hedging eliminates the very currency exposure

the American Expat requires for financial planning

purposes. In contrast, an unhedged ETF tracking a

foreign country or region’s index provides and

maintains the proper currency exposure for the

American abroad. In sum, ETFs solve the geo-

graphic and currency diversification problems of

American expats in a way that facilitates long-

term financial planning.

Why Not Invest Locally When Abroad ?

Americans who wish to keep local currency exposure may wonder why they should use U.S. markets rather than those in their cur-rent country. There are several reasons:

Significantly lower fees and trading costs: While fees are high around the world, they are much lower in the U.S.

Possible punitive taxation in the U.S. See “Why Americans Should Never Own Shares in a Non-US Mutual Fund”

Record-keeping: U.S. tax statements are comprehensive and make tax report-ing easier.

Security: Because of lower levels of regulation, the off-shore world is littered with scams. The high level of securities regulation in the U.S. provides protection to investors.

Thun Financial Advisors Research ©| 201χ 5

Conclusion

Like many things about living abroad, changing one’s investment

strategy can be an opportunity disguised as a challenge (provided

Americans avoid the major mistakes made by expats abroad). The

structure and efficiency of ETFs allow them to provide solutions to

common tax and compliance challenges faced by Americans abroad.

Most importantly, ETFs are only one strategic element of financial

planning and investment management, and should be incorporated

alongside holistic financial planning (long-term wealth, estate and

tax planning) to fully convert the initial challenges into an oppor- tunity to create a secure financial future anywhere in the world.

Thun Financial Advisors Research is the leading provider of financial planning research for cross-border and American

expatriate investors. Based in Madison, Wisconsin, David Kuenzi and Thun Financial Advisors’ Research have been featured in

the Wall Street Journal, Emerging Money, Investment News, International Advisor, Financial Planning Magazine and Wealth

Management among other publications.

DISCLAIMER FOR THUN FINANCIAL ADVISORS, L.L.C., THE INVESTMENT ADVISOR

Thun Financial Advisors L.L.C. (the “Advisor”) is an investment adviser registered with the United States Securities and Exchange Commission

(SEC). Such registration does not imply that the SEC has sponsored, recommended or approved of the Advisor. Information contained in this re-

search is for informational purposes only, does not constitute investment advice, and is not an advertisement or an offer of investment advisory services

or a solicitation to become a client of the Advisor. The information is obtained from sources believed to be reliable, however, accuracy and complete-

ness are not guaranteed by the Advisor.

The representations herein reflect model performance and are therefore not a record of any actual investment result. Past performance does not guar-

antee future performance will be similar. Future results may be affected by changing market circumstances, economic and business conditions, fees,

taxes, and other factors. Investors should not make any investment decision based solely on this presentation. Actual investor results may vary. Simi-

lar investments may result in a loss of in investment capital.

Contact Us Thun Financial Advisors 3330 University Ave

Suite 316Madison, WI 53705 608-237-1318

Visit us on the web at

www.thunfinancial.com

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