How much can we save from investing in Ireland Domiciled ETFs?

This opinion is originated from Frugal Youth Invests.

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 below shows the Key Statistics of VOO – its Dividend Yield is at 1.33% while its Expense Ratio is at 0.03%.

The image below shows the Key Statistics of VUSD – its Dividend Yield is at 1.23% while its Expense Ratio is at 0.07%. Do note that the Dividend Yield of 1.23% 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.

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. In addition, for accounts with less than US$100k, Interactive Brokers charges a monthly maintenance fee of US$10 every month and this can be offset with trades done on their platform. In other words, one has to pay a minimum of US$10 every month.

Brokerages 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$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.

You might argue that one should buy into Kristal.AI until it reaches US$10k 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, With that in mind, I will still take this as a cost when doing comparison with VOO and VUSD.

Comparison

When it comes to comparing Interactive Brokers, we will have two scenarios to take into account the difference in minimum Account Maintenance Fee. The first scenario will be for readers starting out at a young age of 18 while the second scenario will be for readers starting out after 25 years old, where they are charged a minimum Account Maintenance Fee of US$10 monthly.

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.

The image below shows the estimated breakdown of commission of buying VUSD and VOO monthly. You will be charged $25.80 or buying VOO using FSMOne’s ETF RSP while you will be charged $120/$44.40 (estimated) using Interactive Brokers to buy VUSD. The difference in commission charged is dependent on age and portfolio value. Take note that excluding the savings in withholding tax, you will be paying up to $94.20 more in commission when choosing to invest in Ireland Domiciled ETFs.

The image below shows the savings in WHT for every $4320 invested in VUSD. This means that you will save an approximate USD$12.92 more for every increase of $4320 in investment.

Scenario 1: Investor is 26 years old this year

The image below shows a snippet of the calculation. The difference between my example last year and this year is that I included the potential capital appreciation in investing in S&P500. In this example, I assume that the S&P 500 will return 10% each year. One has to take note that it is impossible to predict the returns each year, but this assumption is meant for today’s discussion only.

To recap, Interactive Brokers charges a minimum monthly Account Maintenance Fee of US$10 every month for account holders who are 26 years old with less than USD$100k (or non-USD equivalent). Assuming that he only uses Interactive Brokers to invest in Ireland Domiciled ETFs, he will incur US$10 every month or US$120 yearly.

In this assumption, we note that the value of the portfolio will be worth more than $100k by 2033 with a cost price of US$52k. This means that he will be paying an approximate of US$44.40 each year from then on.The additional cost of buying VUSD using Interactive Brokers rather than buying VOO using FSMOne’s ETF RSP is shown below.

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$12.92 each year. You will break even once your accumulated capital outlay is more than US$52k.

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 holders 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 an approximate US$44.40 in commission each year until he is 25 years old.

Once he turns 26 years old, his value of portfolio should be worth US$62k, assuming the annual average return of 10% in S&P500. He will be paying the monthly maintenance fee of US$10 each month until his account value hits US$100k, which in this scenario will happen when he is 30 years old.

If you refer to the image below, you will see that after factoring in the savings in WHT, the net additional cost of using IBKR is only just about US$5. This is because the WHT savings is increasing at a rate of approximately US$12.92 each year while your commission is fixed assuming no additional transaction is made. The investor would have broken even in his second year of investing in Ireland Domiciled ETFs.

Conclusion

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. We should bite the bullet for the next 18-20 years (at the very latest) and purchase an UCITS ETF. 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.