This article originated from TheInvestQuest.com

Telegram Group Name: The InvestQuest

Summary

1) The Ultimate List of ETFs for SG Investors

We’ve picked what we deem to be the most suitable ETFs for SG investors, taking into account withholding tax considerations as well as other aspects. We actually have two lists – one for ETFs which give exposure to a particular region/country, and another for ETFs which give exposure to a particular sector.

2) Dividend Withholding Taxes for SG Investors

(Click here for full article on the topic) When holding foreign stocks/ETFs, withholding taxes on the stock dividends often apply. We breakdown the withholding tax considerations for SG investors when it comes to investing in ETFs, for multiple countries. Here are the main conclusions:

• For exposure to US stocks, pick an Ireland-domiciled ETF

• For exposure to Chinese stocks, pick a Hong Kong/Ireland-domiciled ETF. DO NOT pick a US-domiciled ETF for Chinese stocks.

• For exposure to Other Country stocks, check our summary table in the full article to choose between a Local/Ireland-domiciled ETF. DO NOT pick a US-domiciled ETF.

• A US-domiciled ETF may still be appropriate in certain circumstances

3) Other Aspects to Consider When Choosing an ETF

• Explicit ETF costs: Total expense ratio

• Implicit ETF costs: Trading Liquidity, Bid-Ask Spreads, Counterparty risks

• Potential Estate Duties: The US imposes up to a 40% estate duty for non-US residents (including Singaporeans), for holdings of US-domiciled Stocks/ETF in excess of US$60k.

The InvestQuest’s View:

Having analyzed withholding taxes as well as other factors, these are the most compelling ETFs for SG investors who desire a specific regional/sector exposure – to the best of our knowledge.

1A) Selected ETFs for Regional Exposure

We previously wrote on SGX-listed ETFs and identified some of their potential shortcomings (click to see full article).

In our view, there is a strong case to explore the wider ETF universe, especially if you desire diversified exposure to a specific region and/or sector.

The shortlisted ETFs below are categorized by the geographical stock exposure they offer, which is stated on the leftmost column of the below table. We have sourced for ETFs that are denominated in the local currency of the stocks they invest in, as well as a USD-denominated alternative where possible.

Further details on each of these ETFs such as total expense ratios, average trading liquidity, bid-ask spreads and ETF replication method may be found in APPENDIX 1.

Source: Bloomberg, retrieved 9 Nov 2020.

1B) Selected ETFs for Sector Exposure

The ETFs below are categorized primarily by sector exposure and specific region if applicable, which is indicated on the leftmost column of the table.

Further details on each of these ETFs such as total expense ratios, average trading liquidity, bid-ask spreads and ETF replication method may be found in APPENDIX 1.

Source: Bloomberg, retrieved 9 Nov 2020.

2A) Withholding Taxes for SG Investors

For a detailed article on this topic, click here to view.

Quick Explanation of Withholding Taxes:

When holding foreign stocks/ETFs, withholding taxes on the stock dividends often apply. They are a significant consideration for SG investors. Just to be clear, this Withholding Tax applies to the dividends received, and does not apply to the total value of the ETF you’re buying.

When one buys stocks directly, there is one layer of withholding taxes

• From Stock to SG Investor

When one buys ETFs, there are two potential layers of withholding taxes

• From Stock to ETF

• From ETF to SG Investor

For the time being, we will just run through quick examples of how withholding taxes would apply, for a SG investor looking to buy US stocks and China stocks.

Let’s compare ways of getting US stock exposure:

1. Buying US stocks directly e.g. Apple or Microsoft

2. Buying US stocks via a US-domiciled ETF e.g. SPY US or VOO US

3. Buying US stocks via a Ireland-domiciled ETF e.g. CSPX LN

For the lowest withholding taxes, SG investors should choose Option 3 – Buy US stocks via an Ireland-domiciled ETF. In that case, only 15% dividends are lost, vs. 30% dividends lost for the other two options.

Let’s compare ways of getting Chinese stock exposure:

1. Buying Chinese stocks directly e.g. Ping An Insurance

2. Buying Chinese stocks via a US-domiciled ETF e.g. MCHI US

3. Buying Chinese stocks via an Ireland-domiciled ETF e.g. CNYA LN

4. Buying Chinese stocks via a Hong Kong ETF e.g. 2801 HK

Among the four scenarios, we concluded that from a withholding tax perspective, SG investors would be most disadvantaged in Option 2 (buying China Stocks via a US-domiciled ETF).

2B) Withholding Taxes – Main Takeaways

To minimize dividend withholding taxes for long-term foreign stock exposure:

• For exposure to US stocks,** **pick an Ireland-domiciled ETF.

• For exposure to Chinese stocks, pick a Hong Kong/Ireland-domiciled ETF. DO NOT pick a US-domiciled ETF.

• For exposure to Other Country stocks, check** **our summary table to choose between a Local/Ireland-domiciled ETF. DO NOT pick a US-domiciled ETF.

A US-domiciled ETF may still be appropriate in certain circumstances:

1. When the dividend yield for the sector is low

• For example, the SPDR S&P Biotech ETF (XBI US) has a dividend yield of 0.09% as most biotech stocks do not pay dividends. As a result, the performance drag from dividend withholding taxes is negligible.

• Other US-domiciled ETFs in our shortlist that have a low dividend yield are the tech sector ETFs such as Invesco China Technology ETF (CQQQ US), KraneShares CSI China Internet ETF (KWEB US) and ROBO Global Robotics and Automation Index ETF (ROBO US).

2. Where your holding period is short

• Dividends are withheld on US-domiciled ETFs only when distributions are made. If you buy and sell a US-domiciled ETF before the dividend ex-date, you will not be subject to any dividend withholding taxes.

• Do note that the dividend for US-domiciled ETFs mentioned in this article are paid out every quarter, with the exception of Invesco China Technology ETF (CQQQ US), KraneShares CSI China Internet ETF (KWEB US) and ROBO Global Robotics and Automation Index ETF (ROBO US),** **which have annual dividend payout frequencies.

3. When the other costs of owning the Ireland-domiciled ETF are much higher (e.g. higher total expense ratio, lower liquidity, higher bid-ask spread, higher counterparty risk)

• Some Ireland-domiciled ETFs have a much higher total expense ratio or wider bid-ask spreads compared to its US-domiciled ETF peer. Generally, this might occur if the US-domiciled ETF has attracted a much larger AUM, resulting in much higher trading liquidity and better ability to keep overall operating costs low.

3) Other Aspects to Consider When Choosing an ETF

In coming up with our ETF shortlist in section 1, beyond looking at withholding tax considerations, we also looked at other important factors to narrow down the most cost-efficient ETFs for SG investors. They are as follows.

• Explicit ETF costs: Total expense ratio. Read APPENDIX 1 for more details.

• Implicit ETF costs: Trading Liquidity, Bid-Ask Spreads, Counterparty risks. Read APPENDIX 1 for more details.

• Potential Estate Duties: The US imposes up to a 40% estate duty for non-US residents (including Singaporeans), for holdings of US-domiciled Stocks/ETF in excess of US$60k. Read APPENDIX 2 for more details.

APPENDIX 1: More details on Selected ETFs

In some cases, it was not possible/easy to find a ETF that was good in all cost-related aspects. We highlighted those less-than-optimal traits in red, in the below tables. These traits included:

1. Market cap of less than USD 500 million.

2. Total expense ratio of more than 0.5%

3. Daily average trading volume below USD 1 million

4. Bid/ask spread of more than 0.3%

In our shortlist, all the chosen ETFs are physically backed by shares. This is preferred to synthetic ETFs, which add an additional element of counterpart risk.

Selected ETFs for Regional Exposure

Source: Bloomberg, retrieved 9 November 2020.

Selected ETFs for Sector Exposure

Source: Bloomberg, retrieved 9 November 2020.

APPENDIX 2: Estate Duties

Estate Duty (or Estate Tax) is a one time tax that is imposed on the estate of a deceased. For more info, read this article.

Singapore has no Estate Duties. Singapore has abolished Estate Duties since 15 February 2008.This is perhaps an important factor why celebrities such as Jackie Chan, Jet Li and Gong Li have taken up permanent residence here.

However, being a Singapore tax resident doesn’t mean that you are totally clear of Estate Duties.

Individuals who own foreign assets may still be subject to the Estate Duties of foreign countries when they pass on. The most common example would be Singapore tax residents holding US stocks and property at the time of passing. An estate duty of up to 40% will apply to such assets (a more comprehensive list may be found in the table below) that are in excess of a US$60k tax exemption.

Source: M Financial Group, retrieved from https://mfin.com/m-intelligence-details/nonresident-alien-tax-trap-the-60k-estate-tax-exemption

There is little guidance on how US nonresident alien (which includes Singapore-based investors) estate duties are computed. By my understanding, there are technically 12 US estate tax brackets, with tax rates ranging from 18% to 40% (image below). However, accounting for the US$60k tax exemption for nonresidents, the actual US estate duty will be at tiered rates between 26% to 40% depending on your estate size. For instance, a $80k taxable estate would subject the deceased to $5.2k of estate duty.

Using an extreme example, if I owned US$10 million of Apple stock in my personal name and passed on, I would be liable to pay almost US$4 million in estate duties to the US tax authorities!

Source: Adapted from https://www2.deloitte.com/content/dam/Deloitte/us/Documents/Tax/us-tax-us-estate-and-gift-tax-rules-for-resident-and-nonresident-aliens.pdf

Again, this is what we’ve triangulated on the issue. It’s best to check with a tax consultant.

Tax law is complex and continually evolving. Singapore resident investors who are keen to invest in US stocks may potentially avoid estate duties by buying Ireland-domiciled US stock ETFs instead, which do not impose estate duties on Singapore investors.

Separately, it might be worthwhile discussing with a wealth advisor on an appropriate structure to optimize tax efficiency, particularly if you are a high net worth individual. This may involve setting up a Personal Investment Company (PIC) or a Trust structure to hold specific assets. As a PIC and Trust do not technically “die”, they may be effective tools for streamlining estate duties in some cases.

If you find this article useful, do feel free to check out our other ETF and Mutual Fund related articles too!

1. SGX-listed Stock ETFs: Which are good enough for our readers?

2. SGX-listed Bond ETFs: Which are good enough for our readers?

3. Best ETF to buy for China Stock Exposure

4. Ultimate List of LEVERAGED Stock ETFs

5. When to use Active Mutual Funds vs Passive ETFs

6. Ultimate List of Mutual Funds for SG Investors