Country specific investment decision

Hi everyone !

I have a bit of a niche question but thought you’d enjoy the challenge.

So currently I’m exclusively investing in this ETF that tracks the whole developed world, about 60% of it is USA based:

In the last 10 years it has yielded an average of 11.4%, it is accumulating and has an expense ratio of 0.2%
It is 100% stocks.

The capital gains here are taxed at 28%.

I’m thinking of diversifying a bit, maybe 30 or 40% into something else.

A very popular option here is an actively managed fund that has a mix of stocks and bonds (about 50/50) with an expense ratio of 1.7%. In the last 10 years it has yielded 8.3% (this amount is net of the 1.7% expense ratio)

The thing is, here we don’t have 401k’s and IRA’s with tax benefits. The closest thing we have is this category of actively managed funds. If I withdraw the money from it at any time after 8 years the capital gains are only taxed at 8,6% instead of the regular 28%.

What do you guys think ?

Hey @swizzle_john!

Can I ask why the capital gains are taxed at 8.6% instead of 28%? What taxing body treats an actively managed fund different from an ETF? I guess I’m skeptical of that assertion… I’d want to be sure that’s right before I offer an opinion. :slight_smile:

Hi @Jeremy !

Thanks for taking the time to reply.
So here in Portugal we don’t have anything like 401k or IRA or similarly tax advantaged accounts.
The closest thing we have are these retirement accounts called PPR.
They are actively managed funds, an investment vehicle with tax advantages.
There are many rules around them but mainly, money that you’ve had there for more than 8 years will only pay 8.6% on its capital gains.
For example, the comparison above would look like this:

If 10 years ago we put 1000€ on the etf and on the fund, today we’d have:

ETF: 2961€
Fund: 2219€

Capital gains:
ETF: 2961-1000=1961
Fund: 2219-1000=1219

28% of 1961= 549 in taxes on the ETF
8,6% of 1219 = 104 in taxes on the Fund

ETF Total Profit:1412€
Fund Total Profit:1115€

Of course it’s lower even with the tax benefit but it offers some diversification as it’s about 50% bonds, and of course, we don’t know the future and the ETF may do worse than the 11% it did in the last decade.

(the 8.3% yield in the last 10 years is net of the TER and management fees)

Huh… even by your math the ETF with the higher tax is actually profiting more. Is there any lower-fee option that will be taxed at the lower rate?!

I doubt investing in both would represent more diversity… The ETF is likely already owning the entire market… the actively managed fund will just own the same market with higher fees. You don’t get anything (except the lower tax rate, which you have already shown isn’t worth it).

The tax thing is really weird to me. It’s annoying they require you to pay absurdly high fees to qualify for the lower taxes. I would likely do whatever makes more money though, and by your math it seems to be the ETF?