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2022 Investment and Market Outlook Guide

2022 Investment and Market Outlook Guide

Walkner Condon’s team of experienced financial advisors explores key topics that are top-of-mind as we transition out of 2021 and into a new calendar year, featuring the market outlook and review from Syl Michelin, a Chartered Financial Analyst™. Other topics include index funds, sector & factor performance, a pair of U.S. expat-focused pieces, and more.

Below you can find a breakdown of the individual pieces in this year’s outlook. 

1. The Year of Impossible Choices: 2021 Market Recap & 2022 Outlook
Syl Michelin, Chartered Financial Analyst™

Through a lens of current and historical data, Walkner Condon’s resident CFA® – and one of our U.S. expat advisors – explores the last year in the markets, with an eye on factors that may impact 2022. 

2. It Only Gets Harder from Here: Valuations, Bond Environment & Wage Growth
Clint Walkner

With a multitude of market highs throughout 2021 and a long stretch of gains post-2008 financial crisis, it would appear the “easy” money, if we can call it that, has been made. In this piece, Clint dives into the three main challenges as we move forward into 2022.

3. Reviewing 2021 Sector and Factor Performance and Positioning in 2022
Mitch DeWitt, CFP®, MBA

The markets were up routinely throughout 2021, but that doesn’t mean the gains were shared equally. Mitch discusses the sector winners (and losers) of the last year, along with what factors – things like high beta, value, and quality – had their day in the sun. He also goes into what might be on the horizon this year.  

4. Exploring Index Funds: History, Construction, Weightings & Factors
Nate Condon

The goal of this piece from Nate is to provide a general overview of indexes, the differences in how indexes are constructed, including equal-weighted indexes versus market capitalization-weighted indexes, and passive and factor indexing strategies.

5. Three Reasons to Look at Investing Internationally in 2022
Keith Poniewaz, Ph.D.

Though the U.S. dollar had its best year since 2015 in 2021, Keith – another of our expat advisors – explains several reasons to think about international investments in 2022, including the very strength of that U.S. dollar, valuations, and the rest of the world’s growth in GDP.  

6. Top Five International Destinations for U.S. Expats in 2022
Stan Farmer, CFP®, J.D.

One of our U.S. expat experts, Stan jumps headfirst into possible locations for Americans to consider in 2022 if they’re thinking about a move abroad – or even if they’re just wanting to dream a little bit. Stan covers ground in South America, Europe, and Asia in this thorough piece, perhaps his first crack at being a travel journalist in his spare time.

What is the Best Brokerage for Expats?

What is the Best Brokerage for Expats?

One of the challenges for expats that leave the United States and want to invest elsewhere is that the traditional investment options available to them in the United States may not be available. (For more information on this topic, read our white paper on the topic). As a result, there are a couple of custodians in our experience that are more “friendly” than others, a more exhaustive ranking of which can be found in this article from Barron’s

Please note that most U.S. brokerages do not accept clients internationally, or will often freeze or restrict purchases in customer accounts whenever they learn that the account holder has moved abroad. It is best to ask your financial advisor or contact the brokerage house directly to do some due diligence on your particular situation before moving forward with any of these options. For instance, some expats believe that they can just use a P.O. Box or a friend’s address, but in many cases, it is not that simple (and potentially not legal either!). It can leave the expat with very few comfortable alternatives.

Rather than provide an exhaustive evaluation of various brokerages, we’ll provide commentary on the two brokerages that we believe, from our perspective as advisors dedicated to working with international clients and communicating with hundreds (perhaps thousands) of expats around the world and provide the most coverage for investors living overseas: Charles Schwab and Interactive Brokers.

These two brokers stand apart in our opinion based upon two key criteria for U.S. expat/international investors:

1. Their overall international footprint (the countries that they are “open” to servicing residents; and

 

2. That their international footprint applies whether the account holder works with an advisor (an “institutional” client) or goes it alone (a “retail” client). 

The tools tend to differ for overseas investors utilizing a U.S. brokerage (even when that brokerage is receptive to the non-resident account holder). As products that are offered by prospectus and technically “issued” by the managing firm of the product, domestic U.S. mutual funds are generally off-limits to all investors with a non-U.S. address (even if they are U.S. citizens). Accordingly, those looking for efficient means for diversification will have to look to Exchange Traded Funds (ETFs). ETFs have exploded in popularity in recent years and offer, in many cases, a low-cost, tax-efficient, diversified manner in which to invest. However, more recent regulations in the European Union have restricted, or at least limited, access to ETFs for European Union residents

Accordingly, being able to utilize a U.S. brokerage still often comes with limitations and will often require additional effort, skill, and/or attention than many retail investors may desire. The regulatory landscape, as it has evolved, has certainly required us to utilize a variety of strategies to ensure our clients are appropriately invested. We’ll now provide a brief overview of what our top choices for U.S. brokerages serving the overseas markets bring to the table for their retail and institutional clients. We’ll consider the strengths and limitations generically but would advise that the right choice for an investor will vary depending on both the specific country in which the investor lives, as well as their personal preferences and experience with managing their investments.

Interactive Brokers

Interactive Brokers (IB) has built its reputation as an alternative to conventional Wall Street firms and the champion of the individual investor by offering a truly global platform where individuals can trade not just on the U.S. exchanges, but around the globe on most of the world’s leading stock exchanges. In addition to individual stocks and bonds, customers of IB can purchase ETFs and, most importantly, transact in foreign currencies with very low-cost forex trading. These features can provide tremendous value to investors that live abroad and who earn their living and spend their earnings and savings in foreign currencies. In a sense, IB opened up a truly global institutional-class trading platform for retail investors.

Investors living in “difficult” jurisdictions (meaning countries where other brokers, including Schwab, will not accept clients) would be well-served to check out Interactive Brokers. IB clearly stands alone as the most accessible brokerage platform for international access to the U.S. and most foreign exchanges. There are still places where IB won’t work, including countries where the U.S. Treasury Department’s Office of Foreign Asset Control has slapped it with sanctions, and even a few “friendly nations,” but IB is open for business in more countries than any other reputable brokerage firm. 

Unfortunately, world-class access isn’t always matched with world-class customer service. Interactive Brokers receives a lower score when it comes to getting assistance on the phone, though this has actually improved with time. When there are issues with wire transfers or ACH overnight transfers, it can be frustrating to get actual help from a human being at times. Another caution for relatively inexperienced investors is that the trading platform might seem overly complex for many (particularly the downloadable trading platform known as “Trader Workstation”). 

Moreover, although the commissions are low (or even free, depending on account type), basic features widely available elsewhere, such as news streams and real-time quotations, require monthly subscriptions for IB clients.

Americans should also be very, very careful when purchasing investments on overseas exchanges to avoid the tax consequences of owning Passive Foreign Investment Companies (PFICs). This is one of the great pitfalls that expats must avoid or face daunting tax and reporting issues that are best avoided altogether. PFICs include ALL foreign-registered mutual funds AND ETFs. Often, for every large and liquid ETF that trades in the United States, there are several foreign-registered ETFs that trade on overseas exchanges and which bear the identical name to their U.S. counterparts. U.S. tax residents should be very careful to avoid purchasing ETFs on foreign exchanges in taxable brokerage accounts. Unfortunately, while all foreign-registered ETFs are PFICs, not all PFICs are ETFs (or mutual funds). There are many publicly-traded foreign companies and other entities that generate enough passive income to meet the definition of a PFIC. In this sense, IB’s incredible access to foreign markets can be a dangerous tool in the hands of the inexperienced and/or unaware. For even more information on this, check out our white paper, “Why is it so Hard to Open Investment Accounts for American Expats”. 

Finally, it should also be noted that for residents of the EU, Interactive Brokers has blocked access to U.S.-registered ETFs. Given the dangers of foreign-registered ETFs, discussed above, this leaves Americans in the EU with the daunting task of constructing their portfolios with individual securities (e.g., stocks and bonds) rather than getting their diversification through ETFs. For unsophisticated investors, or even sophisticated investors that don’t have the time or inclination to manage their own stock and bond portfolios, this is a major impediment that must be considered. IB has also made it more difficult for advisors on the IB platform to service EU-resident clients, which is particularly unfortunate given the restrictions on trading ETFs and the aforementioned complications with portfolio construction. It’s an evolving regulatory landscape that has not always been navigated with aplomb.

Charles Schwab

The online brokerage universe has consolidated tremendously over the past few years, and perhaps the greatest single consolidation has recently arrived with Schwab’s acquisition of T.D. Ameritrade. Schwab was one of the first retail brokers to go online many years ago and today is one of the largest brokerage firms in the world. It services retail clients who do not work with advisers, it has its own advisory services business, and it is a leading institutional platform for independent advisors (including our firm and thousands of other independent firms) on the Schwab Alliance platform. 

Schwab offers a wide menu of ETFs and no commissions on ETF trades. It’s a very robust U.S. platform with thousands of dedicated customer service personnel to assist customers of all three varieties mentioned above. The technology platforms that customers can access at Schwab are very user-friendly as well, though perhaps not cutting edge in their technological innovation (the capital has clearly gone more to M&A than R&D!).

More importantly for international investors, including U.S. expats, Charles Schwab has maintained, even expanded, account services for residents outside of the United States over the past few years. Of all the “big” brokerage firms, Schwab stands out for its international ambitions in an era where so many of its contemporaries have closed the accounts of expats and other foreign resident customers. Furthermore, Charles Schwab stands apart from the other majors in expanding the country menu for clients both on the retail and the institutional platform. While Fidelity offers some expanded accessibility on the institutional side to foreign residents working on its advisory platform, it has been prominently chastised in the expatriate community for kicking retail customers living outside of the United States to the proverbial curb.

However, even Schwab’s international ambitions have their limits, so Schwab may or may not provide the ideal solution for the expat/international customer, depending on individual circumstances regarding the customer’s residence and/or whether the customer works with an advisor (institutional client vs. retail client). If you want to see whether you live in a permitted country, Schwab provides a convenient link to try to open an international account: 

https://international.schwab.com/open-account-intro

From there, you can simply go to the drop-down menu of countries on the page and select your residence country to determine whether you can complete an application or whether Schwab is unavailable for residents in your country at this time. 

For clients living in the EU and working with U.S. independent advisors on the institutional platform, Schwab offers a key advantage: access to U.S.-registered ETFs. Unfortunately, retail Schwab customers with EU addresses will be blocked from purchasing U.S.-registered ETFs. Accordingly, just as with IB, retail customers in the Eurozone are considerably hampered by the EU rules that foreclose access to simplified diversification offered by ETFs (and mutual funds).

This is by no means intended to be an exhaustive examination of the advantages and limitations of the best brokerages for expat and/or international investors who hold, or wish to open, accounts in the United States. Rather, it is our intention to provide an introduction to the brokerages that we have found to be the best solution for the largest number of foreign investors, particularly U.S. expats. As with most things related to investments, individual results and experiences will vary. Moreover, the regulatory landscape is fluid and ever-changing. As independent advisors who are dedicated to serving the international community from the United States, we aim to educate and inform this community on a variety of topics of which the ability to hold investment accounts ranks prominently for reasons that hopefully are now quite obvious. The decision on finding the right brokerage (or simply any U.S. brokerage) is not a one-size-fits-all proposition, but one that requires analysis of the investor’s needs, preferences, wealth and, of course, residence status. If you would like to have a conversation with one of our advisors to see if we would be a good fit for your particular situation, we invite you to learn more about our international team by visiting our website.

The Walkner Condon U.S. Expat Team

UPDATE: This piece was originally published on Nov. 1, 2019. It has been revised to reflect changes in the international/U.S. expat investing environment to give you the most up-to-date information.