Asked by Anonymous
Asked on 07 May 2019
Investing in low cost S&P500 or global ETFs is a great idea, but why do the roboadvisors invest in the ETFs domiciled in the US, which is not tax efficient for Singapore investors.
This is a great question and Endowus has reviewed the pros and cons of accessing various products and we believe that the most efficient way to access certain asset classes or funds is through a third option - Irish UCITS Funds(Unit trusts). I have seen many comparisons but nobody has really delved into the key issues in detail. Because they normally compare the US ETFs vs Irish UCITS ETFs or UCITS ETFs vs UCITS funds. I will review the pros and cons of the respective fund vehicles below;
Furthermore, for UCITS funds, because you are buying at NAV at daily liquidity there is no additional cost of transaction and no need to inefficiently fractionalize shares(llike ETFs) as you can invest to the cent at NAV price. Finally, these funds have a broader choice than UCITS ETFs and they tend to be at scale much cheaper in terms of total costs.
There is also another important factor that many people don't discuss as much as taxes, and that is the impact of FX on risk and returns. We pursposefully build and access UCITS funds denominated in SGD or Singapore dollar hedged products in the case of fixed income products. Whereas you are taking FX risk with US or other ETFs, which involves additional costs. This is a big additional benefit to accessing the products through Irish UCITS fund structures.
So if you combine all of that, UCITS Funds from the likes of PIMCO and Dimensional that Endowus uses, are in fact the most cost-efficient, tax-efficient vehicles and removes completely any FX risk. Thereby allowing you to invest your Singapore dollar savings as a Singapore based investors with peace of mind. Thank you!
That is a really good question!
All dividends of US-listed securities are subject to 30% dividend withholding tax (WHT). They apply to US listed assets whether they were bought through StashAway or via a broker. The WHT is held at source and the rest of the dividends are redistributed back to your portfolio(s) and reinvested automatically.
Under the QII (Qualified Interest Income) rule, some of the dividend WHT from US domiciled funds can be claimed back. At StashAway, our broker Saxo will do this on your behalf. We will do this once a year, and will notify you via email if you have any claimable WHT, which would be redistributed to your portfolio and automatically reinvested. We reimbursed clients their WHT refund for the year 2017 in October of 2018 and will do so again this year. The process is simple, we (Saxo and us) do the processing, you get the email. Every client will get the refund that they are entitled to. This is the case even if you closed your account. We will still send you an email (and if your account is not closed a push notification as well) to inform you of the refund. You can contact our support team via WhatsApp, email, Facebook or by calling us and we will manully withdraw it for you.
For more details, you may like to view the Dec 2017 iShares report on QII ETFs. Some examples of QII ETFs that StashAway invests in are 20+ Year Treasury Bond (TLT) and 10-20 Year Treasury Bond (TLH).
Our investment team has given serious consideration to the 30% WHT and have considered other exchanges that have lower or no withholding tax. However, at the end of the day, we have decided to stay with US-listed securities despite the tax implications due to the its deep liquidity, reputable fund management and most importantly, the lower tracking error. If you'd interested to see a comparison between US-listed securities and foreign securities, here is an article that presents its case.
I have also shared our returns here, and I think it illustrates our point that despite the withholding tax, the pros do outweigh.
Dividends and bond coupons will be subject to a 30% U.S. federal withholding tax in line with tax regulations of the U.S. Internal Revenue Service. Nevertheless, ETFs listed in the U.S. are still preferred over ETFs listed in other countries like the U.K. after taking into consideration factors including liquidity, bid-ask spread, expense ratio, ETF fund size amongst other factors.
AutoWealth works with our partnering custodian to seek partial reimbursement of the withholding taxes from the U.S. Internal Revenue Service, where applicable.