The genesis of this topic is the “Dividend taxes” thread that Ohai started a couple of weeks ago. He asked if there were any structured products that mimicked the return of the S&P 500, that didn’t pay dividends, presumably to avoid the taxation of the dividends as they were paid.
As I stated later in the thread, a lot of foreign mutual funds pay dividends, which are subject to tax in the local countries. And I further showed that in reality, most people don’t get full credit for those foreign taxes. (I just did a tax return for one guy who paid $15k in foreign taxes, and got to deduct ONE dollar of it.) This is one good reason NOT to invest in foreign countries.
I recently heard in a webcast that the correlation between foreign stock returns and domestic stock returns is extremely high (when stripped of the currency fluctuations), which suggests that there’s not a lot of value in going foreign. The reason why foreign stocks offer different returns is mostly because of the currency fluctuations, which is why foreign funds will perform differently from US funds. (The speaker was only really discussing the developed markets–UK, Canada, France, Switzerland, Japan, etc. Data might be different for emerging markets.)
If all of this is true, then allocating money to international funds is probably a losing battle, because of the lost tax credits. Maybe a better strategy would be to invest in the domestic market and use some kind of currency futures to capture the currency fluctuations, so you don’t have to pay foreign taxes that you won’t get credit for. (Of course, you’ll have to pay US tax on the realized gains, but I have to believe that’s better than the deadweight loss of the foreign taxes foregone.)
So the question is this: I’m sure that the super-wealthy have a lot of options open to them for investing in currency. But what is available to the masses? I’m looking for something akin to a mutual fund–something that you don’t need a million dollars to invest in.
(And of course, discussion on the topic is always welcome.)