Investing and performing Dollar Cost Averaging on Ireland-domiciled ETFs is getting popular nowadays among investors in Singapore. Reason being Ireland-domiciled ETFs have a lower dividend withholding tax of 15% compared to the 30% if one invests in ETFs listed in the United States and are incorporated in the United States. 50% dividend withholding savings may be enticing for us to switch over to Ireland-domiciled ETFs listed in London Stock Exchange but are we actually saving more in the long run? Today, I will get my hands dirty in exploring the savings that we might recognise if we make the switch.
For a fairer comparison, I will be using VOO (Vanguard S&P 500 ETF) and VUSD (S&P 500 UCITS ETF (USD) Distributing). VOO is listed on the New York Stock Exchange while VUSD is listed on the London Stock Exchange. Both ETFs have the same currency of USD so that there won’t be additional exchange currency risk to consider.
VUSD vs VOO
For the basis of today’s comparison, I will only be looking at the Dividend Indicated Gross Yield provided by Bloomberg. In normal circumstances, I will be looking at Total Expense Ratio and Tracking Error to decide which ETF to choose from.
The image below shows the Key Statistics of VUSD. The Dividend Indicated Gross Yield is 1.36% while the Total Expense Ratio is at 0.07%.
On the other hand, VOO has a Dividend Indicated Gross Yield of 1.68% while its Total Expense Ratio is at 0.03%.
Platforms to invest in VUSD
The tough part of this section is that not a lot of brokerages in Singapore offer access to the London Stock Exchange and worse of all, their commission is not cheap to invest in.
As far as I know, Maybank Kim Eng, Saxo, POEMS, OCBC, Standard Chartered and DBS Vickers offer access to the London Stock Exchange. The commissions from before-mentioned brokerages are charged exorbitantly, for instance OCBC Securities charges GBP 55 minimum for any buy trade while there are some such as Saxo and Standard Chartered that charges GBP 8 and GBP 10 minimum respectively.
For Interactive Brokers, there’s two types of commission pricing, one of which is Tiered while the other is Fixed. We will be using a Tiered pricing structure as it offers the cheapest commission at USD1.70 for USD-denominated products.
One has to take note of the Account Maintenance Fees to be incurred to use Interactive Brokers. The minimum monthly Account Maintenance Fee of US$10 every month for accounts with less than USD$100k (or non-USD equivalent).
For investors who are age 25 or under, their minimum monthly Account Maintenance Fee will be US$3.
This means that the no matter how small the amount you intend to buy in every month, you have to pay at least US$10 or US$3.
Platforms to invest in VOO
I will be using FSMOne’s ETF RSP to buy into VOO every month. Previously, I did a comparison of using Kristal.AI and FSMOne’s ETF RSP. You may refer to the article over here.
There are few reasons why I decided to use FSMOne’s ETF RSP instead of Kristal.AI even though the latter is free for the first US$50k are as follows.
Firstly, you can buy fractional shares using FSMOne’s ETF RSP but not Kristal.AI. With FSMOne’s ETF RSP, you can buy into VOO with just $50. On the other hand, Kristal.AI requires a minimum amount of 1 share to start their Systematic Investment Plan. What this means is that if VOO is getting more expensive every month, with FSMOne’s ETF RSP you will receive less fractional shares while you have to fork out more capital to own that minimum 1 share of VOO with Kristal.AI.
Secondly, even though Kristal.AI offers zero commission for the first US$50k which can be quite enticing for many, their commission structure is different from each other. Kristal.AI charges investors based on AUM while FSMOne charges based on trades commission. In the long run, once US$50k is hit, Kristal.AI will be more expensive as one has to pay more in fees when their portfolio gets bigger. On the other hand, for FSMOne, since investors are charged by the order amount, the cost will be cheaper in terms of percentage over the total capital outlay in the long run.
You might argue that one should buy into Kristal.AI until it reaches US$50k and switch to other brokerages to continue their RSP but I believe in the long run and the convenience that one will have if they buy using FSMOne ETF RSP from the start. The deal breaker for myself is the minimum share of 1 for using Kristal.AI’s SIP in the sense that I have to fork out more capital if the share price goes up. I would rather own less of the shares than to fork out more cash.
Please take note of the pricing structure for FSMOne’s ETF RSP as below. For each ETF RSP buy order of VOO, the minimum commission is US$1 (excluding GST). In total, for any buy amount less than US$1250, you will be charged US$1.07 (including GST). In addition, please take note of Dividend Handling Fee of 1% of gross dividend subject to minimum of US$2.50. Dividend Handling Fee is charged every distribution. For VOO, since it distributes every quarter, one will incur US$10 minimum every year. To me, I do not think that Dividend Handling Fee is a cost as we do not pay FSMOne US$10 every distribution to receive the Dividend. With that in mind, I will still take this as a cost when doing comparison with VOO and VUSD.
For the basis of comparison, we will have two scenarios to take into account the difference in minimum Account Maintenance Fee that was mentioned previously. We assume that both investors will only use both platforms for investing in ETFs. In addition, we also assume that both investors will fork out S$500 or US$360 every month for the next 15 years. The image below shows the Capital Outlay and Cumulative Capital Outlay in USD if both investors fork out US$360 every month for the next 15 years.
The image below shows the total cost for FSMOne’s ETF RSP each year. The total cost for each year will always be US$23.54 where the cost (%) will be 0.54%.
The image below shows the Dividend Handling Fee. I have divided the dividend by 4 as it distributes every quarter. Because of this, there will be a minimum handling fee of US$2.50 every quarter which makes it US$10 every year. This cost has been added into the total cost for FSMOne every year.
Update: I was informed that the dividend yield of 1.36% for VUSD is as such as the 15% dividend withholding tax has already been taken into account. Therefore, investors will receive net 1.36% dividend yield from investing in VUSD.
The image has been updated accordingly. Looking at the Savings and Cumulative Savings column, we can see that savings will grow steadily.
Scenario 1: Investor is 26 years old this year
To recap, Interactive Brokers charges a minimum monthly Account Maintenance Fee of US$10 every month for account holder who are >26 years old with less than USD$100k (or non-USD equivalent). Assuming that he only uses Interactive Brokers for ETF investing, he will incur US$10 every month which is US$120 every year. The additional cost of buying VUSD using Interactive Brokers rather than buying VOO using FSMOne’s ETF RSP is shown below (highlighted in yellow). At this stage, we have yet to account for any savings from the different dividend withholding tax of VOO and VUSD.
Let’s see if we are able to recoup some additional cost from the savings from the difference in dividend withholding tax. From the image below, it shows that the additional cost incurred using Interactive Brokers to buy VUSD is more than the amount of savings we can get from the difference in the withholding tax.
If you refer to the image below, you will see a trend where you will only benefit from buying Ireland-domiciled ETF every month at $500 when the capital outlay is more than US$82k. This means that the dividend savings are more than the additional cost of buying VUSD. From my own rough calculation that will only happen after about 18-19 years of performing RSP.
Scenario 2: Investor is 18 years old this year
To recap, Interactive Brokers charges a minimum monthly Account Maintenance Fee of US$3 every month for account holder who are >25 years old with less than USD$100k (or non-USD equivalent). In this scenario, we assume that he is 18 years old this year and will only be paying US$36 every year until he is 25 in year 2027.
Assuming that he only uses Interactive Brokers for ETF investing, he will incur US$3 every month which is US$36 every year until 2027 before being charged US$10 every month. The additional cost of buying VUSD using Interactive Brokers rather than buying VOO using FSMOne’s ETF RSP is shown below (highlighted in yellow). At this stage, we have yet to account for any savings from the different dividend withholding tax of VOO and VUSD.
Let’s see if we are able to recoup some additional cost from the savings from the difference in dividend withholding tax. From the image below, it shows that if VUSD has a lower dividend yield than VOO then the additional cost incurred using Interactive Brokers to buy VUSD is more than the amount of savings we can get from the difference in the withholding tax.
For readers who are age 25 and below, they should take advantage of the low minimum account maintenance fee being charged by Interactive Brokers.
With the updated information provided, we can see that in the very long run, we will be able to recognise profits from buying into Ireland-domiciled ETFs. We should bite the bullet for the next 18-20 years (at the very latest) and purchase an UCITS ETF so as to take into consideration of the Estate Tax of up to 40% for deceased investor. The exemption for the Estate Tax is amount above US$60K.
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