How to start to invest in Vanguard ETF? Also which broker to go to to open an account? - Seedly

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Asked by Anonymous

Asked on 12 May 2019

How to start to invest in Vanguard ETF? Also which broker to go to to open an account?

I am interested in the Vanguard ETF. I read in some of the answers that there are some taxes involved (30%) if we were to invest in the US stock exhange. And hence it it preferred to find something similar in the London stock exchange? Also which broker to go to to open an account?

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Kenneth Lou
Kenneth Lou, Co-founder at Seedly
Level 8. Wizard
Updated on 07 Jun 2019

Hey there! I was also curious on this matter, for me personally, I’ve always done the global ETF investing via Robo-Advisors but recently have been looking into investing in the S&P500 and the US stock market as whole. Here’s my own research so far.

TL;DR: For Singaporeans, if you are keen to invest in the US (global) market, it’s potentially a good long term investment:

  • The MGC & VTI which tracks the S&P500 and Total stock market respectively are the two most common attractive ETFs under Vanguard
  • You can do so via your online brokerage

To break it down, there are a few parts which we’ll explain.

What is the S&P500:

  • The S&P500 is an index which tracks 505 of the largest listed companies on the US stock exchanges
  • By largest, we mean it is based on market capitalisation
  • And stock exchanges include the NYSE, NASDAQ and others
  • Some companies include, Apple, Google (Alphabet), Facebook, Coca Cola, etc. (pretty well diversified)
  • Usually people tend to look to the US market because these companies you see above are global in their business operations

What is an ETF:

  • An ETF is an Exchange Traded Fund which is traded on a stock market
  • It basically tracks an index where a pool of investors pool money together to buy into a portfolio of stocks
  • Usually have lower expense ratios compared to traditional mutual fund managers

What is the Vanguard ETF

  • This is one such fund manager company which has a ton of ETFs which track US companies in the stock market
  • They are an index fund pioneer, with it’s founder (John Bogle) being a legend in this space

Source: VANGUARD. Yields from Ameritrade and Motley Fool.

The two most popular Vanguard flagship funds are:

It’s expense ratios are merely at 0.04% and it’s dividend yield sitting between 1.69% to 1.88%

If you look at the returns for the MGC (S&P500 tracker) since the start, this is what it looks like:

  • Average 10 year returns at 15.76% p.a
  • Current fund total net assets sit at $1.9 billion
  • Some companies include Microsoft, Apple, Amazon, Alphabet, Facebook, Berkshire Hathaway, Johnson & Johnson, Exxon Mobil, JPMorgan Chase etc.

Similarly if you look at the VTI (Total stock market tracker) since the start, this is what it looks like:

  • Average 10 year returns at 16.06% p.a
  • Current fund total net assets sit at $772.7 billion
  • Some companies include the ones above but also over 4000 mega, large, small and micro stocks

BOTH look pretty amazing when it comes to capital gains. (Rise in price of the ETF)

Therefore if you are looking for a long term (more than 10 year timeframe) investment, this is actually a pretty solid investment that appreciates over time.

Some downsides include:

  • 30% withholding tax (another fancy word for dividend tax for foreigners)
  • Under US domestic tax laws, a foreign person generally is subject to 30% US tax on its US-source income.
  • When markets are down, you similarly bear the brunt of your investments as well (so you may be unlikely able to withdraw your investments in recessionary markets)
  • It’s not that straightforward to invest in US ETFs from Singapore

Where can you buy the Vanguard ETF?

  • Your online brokerage (eg FSM, POEMS, DBS Vickers etc)
  • You buy these as stocks using their tickers (VTI or MGC)
  • However, you can also choose to buy other trackers like the SPY (S&P500 tracker) which is by another company called SPDR

I'm personally using FSM and Vickers.

In this next portion, I will go deeper into the tax portion and how to overcome the additional tax deductions. If you are not interested, it's more of a further reading for more advanced investors!

What is the Withholding tax for Singapore Investors?

Withholding tax is a tax on interest or dividends paid to foreign persons.

To illustrate, imagine that you buy US$1 million worth of US stock, which pays a 4% dividend yearly. The US$40,000 annual dividend is subject to a 30% withholding tax, so US$12,000 is deducted from your dividend to be paid to the US government.

How to get around this Withholding tax for Singapore Investors?

US and Ireland actually have tax treaties which retail investors like you and I will be able to benefit from. It’s a form of tax avoidance and perfectly legal as well, which most big companies with Tax advisers from PwC, KPMG actually do on a daily basis.

In particular, there is a US-Ireland tax treaty that reduces withholding tax from the standard 30% to 15%.

If you buy an Ireland domiciled ETF listed on a European stock exchange, you pay a 15% withholding tax. (Instead of the normal 30% if you were to directly buy from the US stock exchange)

These include the Ireland-domiciled Vanguard S&P 500 UCITS ETF (VUSA) or the iShares Core MSCI World UCITS ETF USD (IWDA). Both of which you can actually buy via your normal online brokerages.

Some problems with buying such ETFs:

  • Typically the expense ratios are slightly higher (more than 0.04
  • Less liquidity as it’s not the main US stock trackers (bid ask spreads are not as good as the US ETFs which have superior liquidity)

Here’s a good summary of Ireland domiciled funds here if you are keen to get the full list

Are there capital gains tax?

As a non-US tax resident, you are exempt from capital gains tax.

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Yoon Tay
Yoon Tay

19 May 2019

Thanks Kenneth! May i know what are the other brokerages that offer a lower trade fees? :)
Kenneth Lou
Kenneth Lou

22 May 2019

Hey Yoon! You can choose custodian accounts (basically means they hold the shares on your behalf) eg FSM or SCB trading accounts which have lower trading fees!
Gabriel Tham
Gabriel Tham, Kenichi Tag Team Member at Tag Team
Level 8. Wizard
Updated on 07 Jun 2019

You are right that there are similar Vanguard ETFs listed in london stock exchange.

To invest in London Stock exchange is similar to US stock exchanges. You need a brokerage platform with access to London Stock Exchange. Most brokers who have access to US will also have UK access since these 2 are very big exchanges.

I am personally using Standard Chartered Online Trading. However, you can try Interactive Brokers too.

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Gibson Tang
Gibson Tang

25 May 2019

For Vanguard, they have a bunch of ETFs which are not just focused on S&P, they have ETFs based on tech stocks, emerging markets etc although their S&P version is the most common. You can look at Berkshire Hathaway B class shares which is about 200 usd per share instead of their more common share. The benefit of Berkshire Hathaway is that it is a company, not ETF, so you pay no fund fee. I personally have some in Berkshire Hathaway B class as I trust Warren Buffet. I use FSM for US stocks
Harvey Tan
Harvey Tan
Level 4. Prodigy
Updated on 25 May 2019

In the US, there is 30% dividend tax witholding. That is for every $1 dollar of dividend / share announced by the company, you will only received 70cents/share. Uncle Sam collect the 30cents

Go with Interactive Broker. Commission is one of the lowest.

But there is a minimum of US$10 minimum account maintaince per month if your account size is less than 100K USD.

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Albert Yow
Albert Yow
Level 1. Freshie
Updated on 07 Jun 2019

I Would like to buy Ireland domiciled ETF with regular saving plan. Which brokerage would you recommend ?

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Yoon Tay
Yoon Tay

19 May 2019

May i know is Ireland domiciled ETF (S&P 500) available on TD Ameritrade?
Jonathan Chia Guangrong
Jonathan Chia Guangrong

20 May 2019

TD Ameritrade will not allow access to UK/Ireland stocks. Only US ones