Investing in Global ETFs from Switzerland

Hi forum community,

Recently, I’ve gotten into ETFs and want to start investing long-term using two ETFs (MSCI World & MSCI Emerging Markets). Ideally, I would want to invest in both indexes every month using a savings plan. But because no Swiss brokers have that option, I’ve decided to invest quarterly or semi-annually.

now I’m busy choosing the ETFs and I noticed that the majority of ETFs are traded in USD and EUR, and only ETFs tracking the Swiss stock market (SMI) are denominated by CHF. The only others I’ve found are hedged ETFs, but these are rate and often very expensive, and have low trade volumes and liquidity.

I don’t have a EUR or a USD bank account. That means that I’ll be paying my Swiss broker some nasty currency exchange costs on top of their already-high fees just to buy the ETFs.

Has anyone here had experience with this problem and have you found a solution? I just want a simple way to invest in global ETFs on a regular basis at the lowest possible cost. How should I go about it?

In Germany, there are a couple of banks/brokers which let you open free ETF savings plans. I would prefer to use a Swiss broker though, so that I don’t have to change CHF to EUR every month. But if the money has to be exchanged anyway, even when I buy ETFs through a Swiss broker, then Germany may be worth considering. Or am I getting this all wrong?

I look forward to your opinions and suggestions.

Kind regards to all.

First of all, you need to consider that the MSCI World is heavily dependent on the US, with more than 60% of it being made up of US stocks. The “world” in its name is a bit misleading – or maybe the world as seen from the US. The MSCI Emerging Markets index, on the other hand, tracks stocks across multiple countries (China, Korea, Taiwan, India, Brazil). China makes up 30% of the index.

My broker doesn’t offer stock savings plans. It doesn’t seem to be common in Switzerland.

When deciding on the intervals at which you plan to invest, you should consider the brokerage fees. Many brokers charge a minimum fee per transaction. If, for example, you pay a minimum fee of 20 francs per trade and you invest 500 francs per quarter, the brokerage cost will be 4% of the investment. That’s way too much in my opinion. In this case you would be better off investing 2000 francs a year, all at the same time.

As you said, the majority of affordable ETFs are denominated by the USD or EUR. If you buy shares with CHF, you may get a good or bad exchange rate depending on your broker. In every case, the spread will add an extra cost.

Currency exchange costs are hard to avoid. What you do want to do is get informed about your broker’s currency exchange spreads. You could also simply note the spread when you make a purchase and compare it to the stock exchange’s currency spreads. Spreads can be anywhere between 0.2% and 2%. If your broker’s spread is closer to 2% than 0.2%, I would recommend changing brokers. As you correctly noted, currency exchange costs can seriously detract from returns. In fact, this cost can hit you harder than custodial fees.

I don’t know of any way around this. Even if you open a EUR or USD account, you will still pay spreads when transferring CHF to your USD or EUR accounts. Banks generally have worse exchange rates than brokers. The only advice I can give is to use the broker with the best currency exchange spreads.

You can hedge against currency exchange risks, but that costs money too. In most cases hedging doesn’t pay off over the long term (unless, for example, you are sure that the USD or EUR will fall against the CHF).

Another alternative is to buy ETFs in the currencies of the indexes they track. For example, a DAX ETF in EUR, a Nikkei ETF in yen, etc. The advantage of doing this is that you diversify your currency exchange risks. The only challenge is that you need to have to make fairly large investments in order to make the costs of buying and selling in foreign currencies worthwhile.

Thanks for your long reply.

I decided on the MSCI World and the MSCI Emerging Markets because my research shows that using these two indexes would let me achieve a very broadly diversified portfolio. I am aware of the fact that the indexes are largely composed of US stocks. But since the ETFs track the index, they will be rebalanced if the US market dips. If for example, European markets strengthen in relation to the US, the fund would increase the European stock component. Or maybe I do not correctly understand how this works?

For these ETFs, the currency exchange rate is buy 60.52 and sell 60.55, so the spread is 3 centimes. That’s around 0.05%, so is that a good spread? Or what did you mean by comparing to the stock exchange’s spread?

My broker charges 6.90 francs for small transactions (<700) which is why I want to get just 2 ETFs initially. That’s why, for now, a portfolio with 70% MSCI World and 70% emerging markets seems to make sense. Trying to achieve the same diversification with your strategy would be very expensive.

ETFs try to replicate the performance of the underlying index (the MSCI World index, in this case). But that index only includes companies in developed countries which have high and average market capitalization. If you want to diversify, the emerging markets ETF is a good option.

Indexes are weighted. Companies with high market capitalization are disproportionately represented. At the moment, the US has a large share of global market capitalization. This should not to be confused with the GDPs of individual countries, because the balance is very different in this regard. This setup could, theoretically, change. That would also change the index. But the exact way in which the index is defined is complicated (which countries are counted as developing and which as developed, how mid-cap and high-cap are defined). You can find this information here:
https://www.msci.com/index-methodology

The spread which you mentioned is the bid/ask spread on a single fund share – the difference between the best available bid and the best available offer. When you place your order, make sure to use a limit order which is lower than the best available offer. The lower your bid is, the more likely it is that you will buy fund shares below the market rate, but you run the risk that your broker will not be able to fill your order because sellers may not accept your bid.

But what I meant in my previous post was not the bid/ask spread for the ETF, but the currency exchange spread for changing CHF to EUR in order to buy the EUR-denominated ETF. Before you can buy shares denominated by a foreign currency, your CHF has to be changed into that currency.  

For example, if the interbank exchange rate for CHF to EUR is 1/1, your broker will not let you buy 100 euros of shares for 100 francs. They will add a markup on the currency exchange. For example, you may pay 105 francs for 100 euros of shares, so the currency exchange cost would be 5 francs.

Most brokers do not transparently publish their spreads. You have to specifically ask your broker for them or look them up in your transaction history.