US Domiciled ETFs vs Ireland Domiciled ETFs

It is no doubt that one would gain more returns in investing in Ireland Domiciled ETFs as the dividend withholding tax is 15% compared to the 30% dividend withholding tax if one were to invest in a US Domiciled ETFs. However, as we search for the best and cheapest brokers to try and save on the dividend withholding tax, we usually face hurdles such as monthly maintenance fees or being charged for dividend handling fee. These hurdles impede us from realising the full savings potential and might backfire eventually. 

This article will be a follow-up article that I wrote last year discussing the same issue. I recently discovered that FSMOne removed the dividend handling fees of 1% or minimum US$2.50 for investing in the US. This makes me wonder how much more can we save from using Interactive Brokers to invest in Ireland Domiciled ETFs. 

ETFs in comparison 

I will be using VOO (Vanguard S&P 500 ETF) listed on the New York Stock Exchange and VUSD (S&P 500 UCITS ETF (USD) Distributing) listed on the London Stock Exchange. Both ETFs are used to ensure that the comparison is fair as they are traded in the same currency of USD, as there won’t be additional exchange currency risk to consider. For the basis of comparing both ETFs, I will only be looking at the Dividend Yield and Expense Ratio. 

The image above shows the Key Statistics of VOO – its Dividend Yield is at 1.35% while its Expense Ratio is at 0.03%. The image below shows the Key Statistics of VUSD – its Dividend Yield is at 1.11% while its Expense Ratio is at 0.07%. Do note that the Dividend Yield of 1.11% is after incurring the 15% dividend withholding tax between US and Ireland. 

Brokerages to invest in VUSD

Financially Independent Pharmacist recently wrote a detailed article on which brokerages to invest in stocks or ETFs listed on London Stock Exchange. According to the article, there are four ways – Saxo, Interactive Brokers, Standard Chartered and local brokerages. 

Credits: Financially Independent Pharmacist

Maybank Kim Eng, POEMS, OCBC and DBS Vickers are some of the local brokerages that allow access to the LSE. I would like to emphasise on how expensive the commission is to invest with them. For example, OCBC Securities charges GBP 55 minimum for any buy trade while the cheapest local brokerage – DBS charges GBP 20 minimum for any buy trade using Cash Upfront.

For any trades listed on London Stock Exchange, Saxo charges commission of minimum GBP 8 or 0.10%, whichever is higher. In addition, it also charges 0.3% for any currency conversion fee made on their platform and a 0.12% custody fee on NON SGX stocks and ETFs. On the other hand, Standard Chartered charges minimum GBP10 or 0.25%, whichever is higher for shares traded in GBP. 

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 USD$1.70 for USD-denominated products. The Fixed pricing structure is unfavourable for many investors buying into Ireland domiciled ETFs every month, as it charges a minimum of USD$5 for  USD-denominated products.

Tiered Commission

Brokerages to invest in VOO

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$10k 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$10k 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$10k is hit, Kristal.AI will be more expensive as one has to pay more in fees when their portfolio gets bigger. Recently, it introduced brokerage charges on buying stocks and ETF listed on stock exchanges. There will be a $1 commission charged by Saxo (broker for Kristal.AI) for every trade, this is on top of the AUM fees charged by Kristal.AI. 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. 

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).

Comparison

We assume that readers will be buying US$360 worth of VOO or VUSD every month for the next 29 or 30 years. This means that readers will be forking out US$4320 every year to buy VOO or VUSD. 

Interactive Brokers has removed the minimum account maintenance fees of $10 USD or $3 USD with effect from 1 July 2021. The minimum maintenance fees is one such fees that deters most investors from investing in Ireland Domiciled ETFs.

The image below shows extra savings in WHT one could get for every $4320 invested in VUSD.

The image below shows a snippet of the calculation.

If you refer to the image below, you will see that even though you are incurring more cost on an accumulating basis, the loss percentage on a cost basis is reducing each year. This is because the commission you paid to IBKR is fixed but the WHT savings is increasing at a rate of approximately US$7.13 each year. You will break even once your accumulated capital outlay is more than US$17.28k.

Closing Thoughts

I thought that I would be seeing a different picture after FSMOne removed its dividend handling fees but Ireland Domiciled ETFs continue to be undefeated. Therefore, it is really a no brainer to buy into Ireland Domiciled ETFs if investors are choosing the path of index investing, buying into ETFs regularly. Aside from the savings you get from the difference in withholding tax rate, the main deal of choosing this path is that there is no estate tax of up to 40% upon death. 

Taking note that the rate of WHT savings will increase each year with regular buying into such ETFs, for those investors who are only allocating a small percentage in ETFs, I think it would be better to stick to the cheaper brokerage alternatives that have access to US markets. This is because the savings in WHT will not cover the additional cost of using IBKR.

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9 thoughts on “US Domiciled ETFs vs Ireland Domiciled ETFs

  1. TD Ameritrade is also an alternative for US stocks and etfs. Zero commissions.

    Graphically, it provides for a longer runway for savings as compared to FSMone.

    However for buy & hold, buying the London- listed US etfs using IBKR will still win out in the long run as the higher dividends from a large portfolio will outweigh the commission costs.

    TD Ameritrade is good for smaller portfolios or for active trading.

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  2. Hi, standard chartered bank actually deducted 20% wht on dividends from my Ireland domiciled etf HMWO etc. I always thought is 15%.

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  3. Hi, I don’t understand your maths. How is an assumed 10% increased in portfolio for 1st year 4532.60 for a capital outlay of 4320? Shouldn’t it be 4752?

    Like

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