Investments for Expats in 2023 – Part 2 (ETFs, Investment Funds, and Treasury Bills)
In the previous part, we discussed REITs, Private Debt, and Loan Notes.
In this article, I am going to focus on some other types of investments deemed apt for expats.
If you are looking to invest as an expat or high-net-worth individual, which is what I specialize in, you can email me (advice@adamfayed.com) or WhatsApp (+44-7393-450-837).
So, let us begin discussing the topic for today, which is the continuation of investments for expats.
ETFs
You’ve probably heard of ETFs, and if you haven’t, let me briefly explain them.
ETFs, short of Exchange-Traded Funds, are the type of funds that can be traded on an exchange.
They are similar to mutual funds but the only difference is that they can be traded on an exchange like stocks.
In most cases, ETFs track a benchmark index while offering lower costs. Nonetheless, some ETFs can be actively managed.
ETFs tend to be a low-cost and tax-efficient alternative to mutual funds.
How do they work?
When you invest in an ETF, you are buying the shares of an ETF just like buying shares of a company.
Investors are required to pay the market price, which differed based on the net asset value.
The net asset value (NAV) of an ETF is determined by the total assets minus the total liabilities.
As I said before, most ETFs happen to replicate benchmark indexes so that they can track their performance.
Some ETFs can be risky and narrowly concentrated to other types of ETFs.
For example, some ETFs may track the performance of a broad market index such as the S&P 500.
On the other hand, some ETFs may be concentrated in sectors such as technology. There may be a possibility for finding ETFs that are invested in sub-sectors such as Robotics (a sub-sector of technology).
ETFs invested in broad indices may own the holding within the same percentage as the benchmark index.
Advantages
Let’s take a look at the benefits of investing in ETFs.
Diversification
By investing in ETFs, you will be investing in different securities at once.
For instance, when you own the shares in an ETF, you will be getting exposure to the underlying assets.
Such a basket of underlying assets can consist of stocks, bonds, commodities, etc.
Therefore, when you invest in ETFs, you will be investing in multiple securities instead of investing in individual securities.
Flexibility and Liquidity
Well, ETFs are traded on stock exchanges, which means, you can buy or sell them during trading hours.
This kind of flexibility is often not available for various types of asset classes such as fixed-income products.
At the same time, the ability to sell them whenever you want would imply that you’ll have a higher level of liquidity.
Cost efficiency
ETFs are passively managed investments, which allows them to have a lower expense ratio.
Whenever there is a lower expense ratio, you would generally be able to invest in those funds at a lower price.
The low expense ratios and low management fees allow ETFs to offer higher net returns.
Transparency
In most cases, ETFs provide the details related to their holdings on a daily basis.
Because of that reason, you can find out about the underlying companies/assets within the ETF you are interested in.
This is a great aspect for investors who wish to conduct due diligence before investing.
Tax benefits
Because of the creation and redemption processes of ETFs, they can minimize capital gains distributions.
This could mean potential tax advantages for investors compared to other types of investments.
Dividend reinvesting
With most ETFs, you can be able to reinvest the dividends automatically. This could lead to higher returns over the long term by compounding the returns you get from your ETFs.
Disadvantages
Having said this about the advantages, let us now have a look at the drawbacks of investing in ETFs.
Volatility
Just like shares, ETFs are also subject to market volatility and fluctuations.
This means they can be affected by factors such as economic events, geopolitical events, and market sentiments.
Liquidity
Yeah, I remember saying that ETFs are liquid as they have a secondary market.
At the same time, it should be duly noted that not all ETFs have a higher trading volume.
In such a scenario, it might become hard to sell your ETF shares, which leads to wider bid-ask spreads.
Additionally, when the markets are volatile, there is a good chance for the market price to get side-tracked from the NAV.
Tracking error
While tracking the performance of a benchmark index, a potential variance may occur between ETFs and the index being tracked.
Tracking errors may occur because of factors such as:
— Trading costs
— Portfolio differences
— Imperfect replication
— Rebalancing
— Sampling techniques
— Management costs
Because of the racking errors, investors may not get the estimated returns from ETFs.
Transparency
While some ETFs, especially passively managed ETFs, disclose their holdings, some do not.
This is particularly applicable to actively managed ETFs or the ETFs invested in less liquid assets or complex securities.
What do I think?
Even though there are some drawbacks to ETFs such as those discussed above, there are many advantages.
With proper research before selection, you may be able to find the ETFs that have the potential for higher profits.
Always weigh in on the costs associated with them so that you can have a better assessment before investing.
ETFs, in my personal opinion, offer a great way of maximizing your profits and diversifying your portfolio.
Investment Funds
Instead of talking about a single type of investment fund, I wanted to provide all types of funds that are known to be the best investments.
Especially, for expats.
To begin with, you all may be familiar with common types of investment funds. These usually include mutual funds, index funds, hedge funds, etc.
However, I am going to focus on some other types of funds, which most people wouldn’t have heard about.
Given below are some of the investment funds, which are deemed best for expats.
Guaranteed Investment Funds
Guaranteed investment funds (GIFs) can be of multiple types such as capital guaranteed funds.
These funds are pooled investments similar to mutual funds but offer principal protection.
Guaranteed investment funds ensure that the entire capital or a part of the capital are secure. In most cases, around 75% to 100% of the initial investment shall be protected.
Even though guaranteed investment funds are said to offer guarantees, they do involve risks.
Guaranteed investment strategies are structured in such a way that investors lose their principal if they are withdrawn early.
In most cases, these investments come with a death benefit. This means the beneficiary would receive the funds in the unlikely event of the death of the investor.
If that’s the case, the beneficiary may receive the specified percentage of the initial investment or the market value, whichever is the maximum.
Therefore, investors should stay invested for the entire term to get the desired returns.
Money Market Funds
Money market funds typically invest in securities that are short-term and high quality.
In most cases, such instruments comprise cash, cash-related investments, debt instruments, etc.
Money market funds are among the low-risk investments available for expats.
It is to be duly noted that money market funds, like all low-risk investments, generate lower returns.
Therefore, these may not be ideal if you are on the lookout for high returns on your investment.
Instead, these can be a great option for parking your money on a short-term basis.
There are certain aspects that may affect the performance of a money market fund, which are:
— Interest rate changes
— Credit risk of underlying assets
— Liquidity risks (only under some situations)
On the bright side, these investment vehicles are known to have a higher regulatory oversight.
As for liquidity, money market funds can be bought or sold on any business day making them liquid instruments.
This means, investors can access their capital quickly when they need it urgently.
Some money market funds may be taxable as per the rate of personal income tax.
Therefore, you must know the details regarding the tax benefits of those you’re interested in.
I’ve provided some detailed information regarding money market funds, which can be accessed by clicking here.
Managed Futures Funds
The name itself gives away the meaning of these instruments, which are futures managed by professionals.
These fall under the category of alternative investments, which are an alternative to hedge funds.
With managed futures funds, you’ll be able to achieve portfolio diversification as well as market diversification.
Managed futures with market-neutral strategies to obtain profits from spreads and arbitrage resulting from mispricing.
Trend-following strategies, on the other hand, profit from long or short positions based on fundamental data or technical indicators.
Managed futures funds typically rely on leverage and derivatives, which magnify both gains and losses.
The management fees or performance fees are charged based on the fund’s performance.
Such costs may have a huge impact on your overall returns, and these vary between funds.
These also have a lock-up period, which means the investment shouldn’t be withdrawn within that period.
The liquidity terms may also be specific, and it is better to know them prior to investing.
While investing in managed futures, investors can ask for the following details.
— Trading strategy
— Annualized rate of return
— Lock-up period
— Fee structure
— Other performance measures
In my opinion, managed futures funds can be a good addition to the portfolios of advanced investors.
Note that managed futures funds may look similar to hedge funds, but they are different.
Market-Linked Investments
Market-linked investments offer returns based on the performance of the underlying assets.
These typically get invested in equity markets, debt markets, or commodities.
These investment vehicles are known to offer a certain level of downside protection or capital preservation.
People often use the terms index funds and market-linked funds interchangeably.
But these are two different instruments and investors should not get confused among these two.
Index funds track the performance of a benchmark index such as the S&P 500 or FTSE 500.
However, market-linked funds are indexed-linked funds or structured products. These combine mainstream investments like stocks or bonds with derivative products.
Market-linked funds offer exposure to the underlying markets or index along with additional features.
What do I think?
There are various types of investment funds that offer good returns based on their features.
You should focus on the specific aspects of such instruments like expense ratio, downside protection, etc.
However, not all types of investment funds may suit the investor’s profile and needs.
Because of that reason, it is wise to consult a professional before investing in such investment vehicles.
Treasury Bills
I have explained a few types of debt instruments in the previous part of this article.
Treasury bills are also among such debt instruments that are deemed best for expats.
Also known as T-bills, these are short-term instruments issued by a country’s specific government.
Most people think that Treasury bills are limited to the U.S. as they’ve only heard of U.S. Treasury bills.
But there are many countries that issue treasury bills, which depends on the specific country issuing them.
A few examples include UK Treasury bills, Government of Canada Treasury Bills, etc.
Another common misconception related to treasury bills is thinking of them as treasury bonds and treasury notes.
The only difference between these three terms is their maturity period, which is different for each of them.
T-bills are issued for a short term ranging around one year or probably less than that.
Treasury notes are issued for a period that typically ranges between 2 – 10 years.
Treasury bonds are of the longest maturity that ranges from 10 to 30 years.
You should also know that T-bills don’t pay periodic interest while treasury bonds and treasury notes pay it on a semi-annual basis.
What do I think?
T-bills are also safe debt instruments as they are backed by the specific country issuing them.
At the same time, they are also liquid and can easily be purchased/sold in the secondary market.
As they are short-term instruments, investors won’t have to wait for longer periods with their capital locked in.
However, there are certain drawbacks to T-bills such as low returns and currency changes.
Other Downside Protected Securities
Now, let us have a look at some other downside-protected investments, which may be a good addition to an expat’s portfolio.
Guaranteed Income Certificates
Guaranteed income certificates (GICs) are similar to the certificates of deposit (CDs) offered by banks and credit unions.
However, it is indicative from the name itself that GICs offer a guarantee/protection.
The principal amount is protected while offering a guaranteed rate of return.
As these are provided by regulated financial institutions such as banks, these are considered to be safe investment options.
At the same time, GICs offer a comparatively lower rate of return, unlike other risky investments.
Bond Funds
The investment funds that are invested in bonds are known as bond funds.
Since these are invested in bonds, they typically carry a lower risk and offer lower returns.
Depending on your host country, you might also get access to government treasury bonds.
These government treasury bonds work in a similar and are a good addition for someone seeking a safer asset to add to their portfolio.
Income-focused REITs
I’ve already discussed Real Estate Investment Trusts (REITs), which are great investment vehicles.
REITs are usually a great way to achieve portfolio diversification and access to the real estate sector.
Income-focused REITs, as the name indicates, concentrate on offering income in the form of dividends.
Be on the lookout while investing in these, as some countries may have higher taxes on dividend income.
Indexed Annuities
An indexed annuity is a type of annuity that offers an interest rate that is related to the performance of a particular index.
When the markets perform well, indexed annuities offer higher returns.
Nonetheless, most indexed annuities have provisions with limits on how much can be earned during a rise in the markets.
Indexed annuities do come with risks such as high surrender charges or limits on the returns they can obtain.
Annuity: An annuity is a financial contract between an insurance company and an individual.
In this contract, the individual is required to pay a lump sum amount so as to obtain a fixed income in the future.
The payment is usually offered for a particular period of time or the rest of the annuitant’s life.
There are three types of annuities namely fixed annuities, indexed annuities, and variable annuities.
The annuitants can choose from a fixed payment structure to a lifetime payout structure.
Taxes on annuities can be of two types:
- The first type is when the individual won’t be subject to taxes until they start receiving the withdrawn amount.
- The second type is when the taxes are paid on the earnings but not on the principal amount.
There are many types of fees associated with annuities such as administrative fees, penalties, surrender charges, etc.
In most cases, annuities are offered a death benefit where the beneficiary starts receiving the payments upon the death of the annuitant.
The contract terms and conditions vary for annuities, and it is wise to know about these terms and conditions before investing in them.
Fixed Annuities
A fixed annuity is an investment that offers a fixed interest rate for a specific period of time.
These are considered to offer predictable returns with a minimum rate guarantee.
Fixed annuities usually offer tax benefits, yet they are taxable when the investors start receiving the income.
These are considered safer investments as they provide the investor with guaranteed income payments.
Fixed annuities generally have a limit on the withdrawal such as 10% of the account value per year.
Therefore, it might become hard for an investor to access their capital during an emergency.
There may also be a surrender charge when the amount of withdrawal exceeds the limit.
Annuity owners under a certain age limit will have to pay a tax penalty of 10% along with the income tax.
What do I think?
First of all, I would like to begin with the fact that most of you already that is low returns.
Some investors among you might have a risk appetite that is different from others.
For example, entrepreneurs or high-income earners may have a risk profile that can sustain significant losses.
However, some people may not have such a risk profile and such people can benefit from these types of investments.
Bottom Line
Handling your investment by yourself can be a gruesome task, especially when you are living as an expat.
Yes, some people may be successful in DIY investing but some may not have the necessary time or knowledge.
Even when an individual is an efficient investor, they may not be able to focus on certain aspects such as taxes.
For example, some countries may have higher tax rates on investment-related income such as capital gains or dividends.
There may also be a possibility for double taxation when the host country doesn’t have a tax treaty with the country of domicile.
Adding to that, investing is a process that requires a lot of aspects that are to be taken into consideration before participating.
Such aspects include:
— Risk tolerance
— Income
— Savings
— Investment portfolio
— Investment goals
— Lifestyle
Because of that, an individual who is busy with their work life may not be able to calculate such aspects.
It is always wise to leave such matters to professionals who have the required experience and expertise.
I, myself have helped numerous expats achieve their financial freedom by handling their investments.
This is done by offering tailored as well as exclusive investment solutions to those clients.
As a person familiar with expat needs, I can definitely assist you regarding your investments.
If you want to find out whether you can benefit from my expert solutions, feel free to call me.
That being said, I hope you found these articles to be useful in finding the investment options deemed best for expats.
Pained by financial indecision? Want to invest with Adam?
Adam is an internationally recognised author on financial matters, with over 760.2 million answer views on Quora.com, a widely sold book on Amazon, and a contributor on Forbes.
