Friday, 17 September 2021

Best Ireland ETFs to buy & hold for the long term for non-US citizens

*Disclaimer: I am not a financial advisor and please do your own due diligence before enbarking on any investments. I am merely sharing on what I find online and know, also on my experiences. They are not a call to buy hence do exercise due dilligence and caution when investing.

Recently, with Interactive Brokers removing the monthly activity fee, it is a no-brainer to switch over to them to purchase Irish Domiciled ETFs listed on the LSE (London Stock Exchange). I have all along been buying US domiciled ETFs where I hold both VOO and VT. Switching over to IBKR, I am now buying into VWRA. When I first decided to move over to IBKR, I was researching on Ireland domiciled ETFs and saw that there were many variations, for example for index ETFs that track the world (similar to VT) you have VWRD or VWRA and for index ETFs that track S&P 500, there is CSPX. It was a little overwhelming I have to say but over time as you find out more, you will understand especially if you take a look on what it is tracking and the holdings.

Accumulating or distributing?

I think something special that I came across when deciding on which ETF I was going to buy was that some of the ETFs had Accumulating (ACC) or distributing (DIS) at the back of the name. After finding out on more it, I was particularly intrigued by it. So what it means is that DIS stands for distributing, meaning that the dividends of the ETFs are distributed out to the holders of the ETFs like you and me if you have the ETF while Accumulating (ACC) means they reinvest any dividends to the fund.

If you have a substantial amount to invest in and want to generate regular income from your portfolio, you should go for a distributing ETF where cash is paid straight to you where you can withdraw it to spend.

If you want to maximise your future investment returns, go for accumulating ETFs like me as they automatically reinvest your dividends back into the fund at no extra expense. This compounds your return, saves you time and spares you commission charges. It’s important to make the right decision as dividends can be a vital part of any investment strategy, whether you need it now or can save it for later.

Why avoid US-domiciled ETFs

  • Withholding Tax

So, I am sure many knows that one of the main reason is the withholding tax, US-domiciled ETFs like VOO and VT have withholding tax of 30% on dividends, where this means that your dividends are taxed or reduced by 30%. On the other hand, Irish Domiciled ETFs has only a withholding tax of 15% which is significantly lesser.

  • Estate Tax

For Singaporeans, we avoid US-domiciled ETFs besides the withholding tax, there maybe estate tax which is incurred after you pass on, it can go up to 40% on amounts above US$60,000 which most investors would be able to hit after investing for a number of years. For example, if you hold $100,000 worth of US Domiciled ETF, and unfortunately pass away, then $40,000 of your US Domiciled ETF ($100,000 - $60,000) will be taxed at 40%. So by buying Irish Domiciled ETFs, you do not directly hold any US assets and hence exempted from the estate tax.

Irish Domiciled ETFs to buy in place of US Domiciled ETF

  • CSPX (Ishares Core S&P 500 Ucits Etf Usd (Acc) ETF) or VUSD (Vanguard S&P 500 UCITS ETF USD) in place of VOO (Vanguard 500 Index Fund ETF)

CSPX provides exposure to large, established U.S. companies similarly to VOO and seeks to track the performance of an index composed of 500 large cap U.S. companies. It is an accumulating fund which means that it's dividends are reinvested back into the funds hence no dividends are paid out.

VUSD is another Irish Domiciled ETFs that tracks the S&P 500 but distributes out the dividends and so if you have a large capital and want to receive dividends in the form of cash payouts, you can invest in VUSD.

  • CNDX (iShares NASDAQ 100 UCITS ETF USD (Acc)) in place of QQQ

CNDX seeks to track the performance of an index composed of 100 of the largest non-financial companies listed on the NASDAQ Stock Market where investment is made into companies across major industry groups including computer hardware and software, telecommunications, retail/wholesale trade and biotechnology similar to QQQ.

CNDX is an accumulating fund meaning that dividends are reinvested back into the fund so no cash payout is being done.

  • VWRA/VWRD in place of VT

This is what I am personally invested in. I buy VWRA (Vanguard FTSE All-World UCITS ETF USD Acc) on a monthly basis and similarly to VT, it seeks to track the performance of the performance of the FTSE All-World Index and comprises of large and mid-sized company stocks in developed and emerging markets.

Something different would be that VWRA has about 3,619 number of stocks while VT has about 9,054 holdings. For me, I just wanted to have a diversified ETF that not only tracks the 500 companies in Singapore. Having such a diversified ETF also means that the volatility is lower and also that prices will not go up as much as the S&P 500 if US companies perform well although the top 10 holdings are US companies. VWRA holds about 58% in US companies and then 6% in Japan and 4 % in China. Not as widely diversified but I like that it has exposure to other countries as well.

Long term horizon

Of course, some people would go for US Domiciled ETF due to the larger trade volume if it is for the short term trading or profits as there are more buy and sell action there. Irish Domiciled ETFs are popular among individuals who have a buy and hold strategy and hope to reap the long term gains coupled with the reinvestment of dividends for the accumulating ETF. I used to buy VT with FSMone as it was a regular savings plan in place with pretty competitive commissions. Another reason was that Interactive Brokers had an inactivity fee for accounts that had less than $100,000 in it. A few months back, they have removed this inactivity fee and so I went ahead to create an account and am now buying VWRA instead. It has to be manual purchase meaning that so far I have to go in to exchange the amount before setting my purchase amount and buying VWRA through Interactive Brokers.

FSMone provided more of a hands-off approach where I could just set a standing instructions with the set amount I wanted to buy and FSMone will help me to convert currency and buy the shares. FSMone also provided fractional shares purchase while Interactive Brokers does not support fractional shares purchase for Irish Domiciled ETFs. It's a long term buying strategy as we see the world evolve and hoping that in 10 years, all these capital put in would have good returns.

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References:
https://www.youtube.com/watch?v=-10iIBnwITg
https://www.bogleheads.org/wiki/Non-US_investor's_guide_to_navigating_US_tax_traps#A4

https://en.swissquote.lu/international-investing/smart-investing/avoid-us-domiciled-etfs-unless-you-want-end-al-capone
https://suzmoneylife.com/which-sp-500-etf-to-buy/

https://www.morningstar.com/etfs/xlon/cspx/portfolio

4 comments:

  1. any reasons why VWRA instd of CSPX?

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  2. Hi, I prefer a broader base which covers the world instead of just United States. VWRA also covers Japan and China holdings which I also want to have exposure to. Hence I chose VWRA over CSPX

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  3. There is some inaccuracy on the estate tax though. It is based on tiering much like a progressive tax. The more you own, the most you getting taxed.

    Anyways, if it is only right to pay tax for the wealth generated through the US market. Most important is to stay invested :)

    https://www.forbes.com/sites/greatspeculations/2018/08/22/how-to-save-u-s-taxes-for-nonresident-aliens/?sh=6805fdfe695d

    ReplyDelete