When I’m thinking about possible car repair costs, I think in multiples of $100. If we’re talking about home improvements, I think in $1000’s. Home renovations? $10,000’s.
If you think about investments in $100’s or $1000’s, your annual return on the investments is probably too small to justify paying ~$250 just to file a yearly reporting form to the IRS.
If you read my last post, you’ll know that is what you'll pay yearly in tax prep charges for Form 8621, which is required by the IRS if you own a non-🇺🇸 ETF.
That’s a pity, because owning an ETF is an excellent way to diversify your investments. With an ETF you own little parts of many companies rather than bigger parts of 1 or 2 companies. That reduces your risk.
So what’s the alternative?
The IRS responds to foreign ETF ownership with the suspicion-fueled requirement of Form 8621. They don't treat the ownership of foreign common stocks the same way.
If you directly own stock in non-🇺🇸 companies, the IRS … well …. yawns. Income from foreign common stock ownership is treated the same way by the IRS as domestic country ownership (as long as that foreign stock is not an ETF).
For example, income from stocks in the form of dividends is reported on a line of your 1040 or, if you get more than $1500 in dividends, on Schedule B. Gains and losses from the sale of stocks are reported on Schedule D.
Bottom line: direct ownership of foreign common stock doesn’t complicate your Form 1040 much at all.
Fine, but what about the diversification problem?
The computer revolution changed stock trading for the better. First, you no longer have to buy and sell 100-share lots of a company’s stock. Brokers in the US and Canada allow you to choose the number shares you trade.
Second, the price of trading has dropped dramatically, usually to a few dollars per trade. Some discount brokers in North America even offer free trading.
With an account at a broker you can easily buy or sell stocks traded on your country’s stock market online with your favorite beverage at hand.
Lower trading costs have eliminated yesteryear’s prohibitive trading costs and punitive per-trade requirements.
But how do you know which stocks to buy and sell?
You can copy the pros, namely the managers of ETFs. If you had their “recipe” for an ETF traded in your country of residence, you could directly buy their favorite companies for yourself.
This is quite feasible because ETF managers almost always publish an online list of their top 10 stock picks. Even though most ETFs include dozens of companies, the top 10 stocks often account for more than half of the total money invested by managers.
You’ll be pleased to know that it’s pretty easy to get that Top Ten list. I’ll go into more detail about the where’s and how's of this expat-friendly investment approach in my next newsletter.
The implication of doing so is this: you can clone a non-🇺🇸 ETF by buying the same stocks its managers buy. The income from those individually owned stocks won’t trigger the IRS reporting requirements that owning the ETF itself would. Moreover, the ease and low cost of trading means that you don’t have to be rich to invest.
If you’re interested in this investment approach you should first explore your country’s discount brokers and publicly traded ETFs. Ask a couple of questions. Can simple trades be done cheaply? Are there ETFs whose investment goals match yours? If both answers are yes, you should consider this clone-an-ETF strategy.
I’m interested in what you find because my specific experience is limited to Canada. Feel free to report what you learn by leaving a comment below.