There’s been a recount, and it turns out there are three certainties in life: death, taxes, and fees for investing. Let’s see what we can do to reduce our investment costs as far as humanly possible.
Here’s the hypothetical scenario. We’ve got £1,000,000 in our ISA. [Hey, this is a Finumus-branded article – Ed.]
And we want to create a 100% global equity portfolio as cheaply as we can.
We obviously don’t believe in active management, stock picking, factor tilts, home bias, or any of the other nonsense.
We just want to get pure, market cap-weighted, global equity beta at the lowest possible cost.
What broker / platform are we going to use?
Of course, we’re first going to consult the excellent Monevator broker comparison table.
With £1m to invest, we will want a fixed / capped cost broker. (As opposed to paying a fixed percentage on all that lolly.)
I’ve decided we’re going to use Exchange Traded Funds (ETFs), rather than funds (or Unit Trusts as we used to call them). That’s because many platforms charge extra fees for holding funds, but not for shares. And ETFs – despite their name – count as shares, not funds.
Moreover I’m more comfortable with ETFs than I am with funds, just because of my own biases.
Let’s plump for iWeb. There’s no annual fees to pay, it’s only £5 a trade, and it’s owned by the sizeable Halifax, which is owned by HBOS, which is owned by Lloyds. (iWeb doesn’t charge extra fees for holding funds. Not that it will matter to us with our ETFs.)
Furthermore we’ll need our ETFs to be traded on the London Stock Exchange (to start with) and have a GBP share class (trading currency).
Let the investment costs crunch begin
If you pull up JustETF and apply a few filters, you will see that the cheapest all-in-one world equity ETF is the Amundi Prime Global UCITS ETF DR (D). (Ticker: PRIW.L).
This will be our ‘straw-person’ to benchmark against:
Now, we could stop right there to be honest. With this fund and its tiny Total Expense Ratio (TER), we’d likely outperform 95% of all other investors already.
| Pros | Cons |
| – All-in-one ETF – Very low investment costs | – No emerging markets – No small cap stocks – Distributing – Suffers US dividend tax |
Do any of those cons matter? If you’re investing a small amount, the answer is no.
Go out and enjoy the sunshine. Take your umbrella, just in case.
What about the emerging markets?
It may come as a surprise – especially to those who live there – that poor countries, according to the financial markets, are not considered to be in ‘The World’.
To City professionals, ‘The World’ only includes rich countries (developed markets, or DM). It does not include poor countries (emerging markets, or EM), or even poorer countries (frontier markets, FM).
It is only the ‘All World’ label that includes EM (but still not FM).
The ‘W’ in the ticker PRIW denotes the World, not All-World. We’re therefore missing out on emerging markets.
Sometimes you’ll see descriptions like ‘All Country World Investable Market (ACWI)’ to signify the inclusion of EM.
Does this matter? Not really. EM is only about 10% of global market capitalization. In truth we could just ignore it.
One would like to think that poorer countries have higher economic growth rates that feed into improved stock market returns. But the evidence for this is scant. Rather, so far they’ve had periods when they did really well (1980s /1990s) and really badly (2000 onwards,) compared to DM.
The best way to think about EM is probably that there are idiosyncratic risks (such as wars and coups) for which one ought to be compensated with some sort of risk premium. Theoretically.
Adding in EM
You say you want a bit of coup and war exposure? Well, the cheapest All-World ETF is 20bps:
That seems like an expensive way of adding a 10% EM allocation.
But what if we stuck with mostly PRIW and did the EM allocation ourselves? Just ETF throws up a few options around the 15 bps mark, including:
Holy Saint Scrooge! We’ve saved ourselves £1,400 by doing our own EM allocation.
Do we need small caps?
We could make a similar argument about small caps. (Though usually the only coups here are in the boardroom.) Do you really need them?
The thing about small caps is that, well, their market capitalization is small.
Again, you’d like to think that small companies grow up to be big ones. Whereas larger companies as a class have nowhere to go but down. Small caps should therefore make a better investment than large caps. And in fact in Fama-French’s famous Three Factor Model there is very much a size premium. Albeit one that once widely publicized in the early 1990s promptly disappeared.
Small caps are a lot more expensive to deal with, too. And we can only easily get DM ones.
But if we must?
Was it worth increasing our costs by 50% just to include a 10% allocation to small caps?
Hmm.
What about emerging markets small caps?
Seriously, you are kidding me, right?
No joke:
Personally I would argue the marginal diversification benefits of including both EM and small caps only truly matter once you’re investing really substantial sums.
Distributions: sneaky platform FX charges
PRIW is a ‘Distributing’ ETF. This means it distributes its dividends to you, rather than retaining them for re-investment (‘Accumulation’). See our previous deep dive on the difference.
The problem here is that PRIW’s distributions are in US Dollars (USD). And most platforms only allow you to hold Pound Sterling (GBP) as cash. (In ISAs you’re not allowed anything else).
So when the USD dividend comes in from the ETF, your ISA platform is going to convert it from USD to GBP for your convenience. Most platforms charge an FX fee of ~1% to do this.
(Although who knows what actual rate you’re getting? I’m sure they would not specifically use an FX broker that charged an egregious spread and kicked back some of their internalization profits to the platform. Because this is not the sort of behavior you ever see in financial markets. Ever.)
Now 1% of the dividend yield sure doesn’t sound like much, does it?
Let’s see:
Adding in the currency conversion cost is like increasing our TER from 5 to 6.8 bps.
That’s a 36% increase in costs! WTF?
What we’d really like is an accumulating version of this ETF. Luckily, Amundi actually has one…
But it doesn’t have it as a GBP share class.
Dividend withholding tax
PRIW has 63% of its exposure in the US. It’s domiciled in Luxembourg. It will be having 15% of distributions from North American companies withheld at source by the IRS in the US. The dividend yield on US equities is about 2% right now.
- 2% * 63% * 15% * £1,000,000 = £1,890
This represents nearly 19bps of annual investment costs applied to our portfolio. It raises our TER including US Dividend Withholding Tax (or as I like to call it: TERIUSDWHT) to 24bps.
Which isn’t something that ETF providers are keen to draw your attention to, surprisingly.
But can we do anything about this?
We have two options:
- Use swap-based ETFs
- Make use of our SIPP
Avoiding US WHT with swap-based ETFs
As an ETF, you can avoid US Dividend WHT by employing a financial instrument called a swap.
Exactly how they do this is beyond the scope of this post. (As you should be relieved to hear. Because I used to help structure this sort of thing for a living, and I can be a real bore about it).
For now let’s just check by comparing two UK-listed ETFs.
They both track exactly the same US index, have similar TERs, and are both accumulating. The only difference is one (from Invesco) uses a swap and the other (Vanguard) doesn’t.
We’d expect a 2% * 15% = 30 bps annual out-performance from the swap-based one.
What do we see?
The swap one outperforms by about 33bps p.a. after accounting for the fee difference.
Now it would be nice if there was a World ETF that did only the US leg as a swap, and the rest normally. Sadly, there is not. Arguably, if someone came along and created such a thing we could pay 24bps for it to be cost equivalent with Amundi’s PRIW.
There are, however, ETFs that do the whole (developed) world as a swap.
For example, Invesco MSCI World UCITS ETF (MXWS.L). Which has a 19bps TER.
Let’s just run our comparison on returns again, to make sure that what is happening in the swap is to our benefit, not theirs:
Yeap. Looks reasonable.
Notice that 63% (US Weight) * 33 bps (what the US only swap ETF saved) = 21 bps.
The only WHT saving is on the US leg; the swap trick doesn’t work in the other countries.
If you’re investing less than £1m, you could sensibly just go with this. Because we’re about to get complicated and – for smaller amounts of money saved – why bother?
An extra 12bps (19 vs 5) seems like a lot to pay to do some stuff in a swap, especially when a swap is actually cheaper for the ETF provider than either full or sampling replication.
And where is my All-World including small caps done as a swap – or a mix of swap and whatever – for, like 10bps?
There isn’t one.
Swapping that for a DIY jobbie
Can we build one ourselves? Use a swap-based ETF for the US stuff and then other, regional ETFs for the other markets?
In fact could we just add a World-ex-US ETF?
Alas, that would be too easy. There also isn’t one of those.
Instead:
We’ve also accounted for dividend FX costs for those ETFs which aren’t accumulation units.
A TER of 8bps is pretty good – and that’s also the TERIUSDWHT, because we’ve avoided US WHT.
Notably, it compares well with 24bps, which was where we began with Amundi’s PRIW.
(No, I don’t know why we’re bothering with Canada either.)
Plan B: avoiding US WHT with your SIPP
The US tax authorities recognize UK pensions – including SIPPs – as tax exempt under a tax treaty.
Astonishingly UK platforms also seem to be able to handle this. Such that, if you’ve filled in the right forms and hold US stocks in your SIPP, you’ll receive the dividends tax-free (in the SIPP).
This also applies to US-listed ETFs, like, for example, the BNY Mellon US Large Cap Core Equity ETF (BKLC), which has an expense ratio of 0%.
Yep, you read that right: 0%.
But in a typical piece of joined-up thinking that will surprise nobody, you likely can’t buy this ETF in your SIPP. Why not? Because under the EU’s PRIIPs regulations, unless you are a ‘professional’ or ‘High Net Worth’ investor you can’t buy a fund that doesn’t issue a PRIIPs Key Information Document (KID), which US ETFs don’t.
Now, you might have thought that having left the EU, the removal of this pointless restriction for Brits might be the one tiny silver lining to the Brexit debacle.
Of course not.
You might also think that you’re a professional / HNW investor. And you may well be.
Sorry, most platforms don’t support declaring yourself such as part of their business model. At least in my experience Hargreaves Lansdown, AJ Bell, and Interactive Investor don’t. Others do, but in any case you’re going to want to save more than a few hundred quid for it to be worth the hassle.
But let’s say for a minute that you’ve got enough money to make this a worthwhile exercise, and you’ve somehow extricated yourself from PRIIPs.
We might have our US Equity ETF in our SIPP, and all others in our ISAs. Or else some mix of this arrangement and using a swap-based ETF in the ISA.
Either way it’s a little messy:
On a bright note, we’re truly crushing our investment costs.
And since we’re all about marginal gains here, let’s fix Canada:
Ladies and gentlemen, I give you the world – for 3bps.
You might immediately decide to spend some of those gains on adding back emerging markets and small caps. (This is called the ‘bounceback effect’).
For bonus points, if you were including small caps you might observe that the US makes up about 60% of global cap weight.
In my PRIIPs-free SIPP I could buy the Schwab U.S. Small Cap ETF (Ticker: SCHA) with a 4 bps fee, and then roll-my own regional small caps. But we are getting seriously diminishing benefits here.
Rebalancing
The nice thing about having everything in a single ETF like PRIW is you don’t have to worry about rebalancing. Conversely, once we’ve separated everything out we have to do rebalancing ourselves.
But not much. This is because – contrary to what the ‘index investing causes bubbles’ people will tell you – market moves do your rebalancing for you.
If Europe outperforms the US by 10% in a year, then my target Europe weighting will be 10% higher. But the value of my Europe ETF will be 10% higher too. So long as I update my target weights to current market cap weights then no rebalancing is required.
On the other hand if I fix them forever then active rebalancing is required. As does any weighting scheme that is not market-cap weighted.
Distribution units also complicate this somewhat. Over time I’m going to be underweight those and overweight my accumulation units. But we can probably just do one or two trades a year to bring things back into line. Call it £20 of trading costs (and the spread).
Not all platforms carry all ETFs
It’s not clear to me why, but platforms generally don’t carry all London-listed ETFs. Not even the plain vanilla ones.
Indeed as a rule of thumb, once you’ve identified the cheapest ETF for a particular asset class and you log onto your broker to grab a bagful, you’ll find they’ll deny its existence.
Strangely, they’ll be happy to point to the one that costs twice as much. Or they’ll only carry the USD trading currency one.
Whether this is…
- Cock-up: they used the ISIN as the Primary Key in their systems, and so can only support one traded currency listing per underlying ETF.
or
- Conspiracy: If you buy the USD one, you’ll have to pay them a load of FX fees.
…I’m not sure. In general their excuse is that they only carry ‘the most liquid one’.
High investment costs are optional
Summing up, let’s run through what we’ve learned, Rain Man style:
- We can track global equities for 5 bps p.a. (but add in paying our platform FX fees on distributions, which brings it up to 6.8 bps)
- If we add a small EM allocation ourselves it’s 6 bps. That’s a lot cheaper than using the ‘All-World’ ETF (20 bps)
- US dividend withholding tax is a (19 bps) problem that we can get round:
- It requires us to get a bit messy rolling our own.
- But can save up to 10 bps (without SIPP)
- If you’re not investing a lot of money buy PRIW.L or MXWS.L and go play outside
- The perfect global equity ETF doesn’t exist (in Europe). If it did it would:
- Do US equity exposure as a swap to avoid US dividend WHT
- Have appropriately weighted EM and small cap exposure
- Have an accumulating / GBP traded share class
- Cost about 10 bps, to be competitive with rolling our own
- (Over to you, Blackrock!)
- If you’re only using your SIPP and can avoid PRIIPs, you could just buy Vanguard Total World Stock Index Fund ETF (VT) – which both avoids US WHT and includes EM, for 7 bps.
- If we hyper-optimize using a SIPP and somehow bypass PRIIPS, we can actually get the full global+EM+small-caps down to 7 bps and avoid US WHT
- Some things we didn’t mention:
- Risks of swap-based ETFs (low, but not zero)
- Bonds
Finally, it’s worth noting how cheap all this is compared to other investments.
For example, the managing agent for my London buy-to-let charges me what amounts to 1.34% of its capital value per annum. That’s about 20 times more than this fully-diversified global equity portfolio.
If you enjoyed this, follow Finumus on Twitter or read his other articles on Monevator.
Wow, great post, very interesting!
Has anyone done a similar thing to EUR based accumulating etfs?
Nice piece, thanks.
You may be biased if it was your job, but I like to avoid tail-risks, so have always felt safer with Physical Replication rather than Swap-based ETFs.
Only other thing I’d say is that for a way to avoid the FX issue with PRIW divis, you could do it through Interactive Brokers, which is not as scary as I thought it would be, & seems v decent when you want to convert currency yourself. But I appreciate it depends how confident one is, & iWeb is great value for most things.
I’m still astonished about the recent discovery of being able to receive US divis in a SIPP without taxation (& slightly ashamed as I should have known it from a previous job) & grateful to you & TI for the info. Thanks again!
Note that HM Treasury is currently consulting on reform of PRIIPs following Brexit. One proposal is “Improved access to a wider range of
investment products (e.g. US Exchange Traded
Funds (ETFs))”. Unfortunately, it could could take a very long time for the implementation of any regulation changes, ETF providers possibly having to issue new Key Information Documents and/or apply for HMRC-approved offshore reporting status, before investment platforms may or may not offer US-based ETFs to retail clients. https://www.gov.uk/government/consultations/priips-and-uk-retail-disclosure
Yes, IKBR charges virtually nothing for currency trades in an ISA (0.03%, no minimum charge) and they are done automatically. Furthermore the minimum spend (£3 per month) will be nothing in a large portfolio and can be offset against your rebalancing trades.
Good comparison. There are some factors that aren’t being accounted for, such as the effect of dividend drag on the income funds, reinvestment costs (including the bid/offer spread), tracking error (including transaction fees), income from share lending, etc. I’m not sure if these factors would be big enough to make a significant difference, but it would be interesting to calculate the actual historic performance of the proposed DIY portfolio, and compare to, say, VEVE/VHVG, VWRL/VWRP, PRIW/PRAW, etc. Something like the FT funds comparison page, so using actual real returns and assuming dividends are reinvested.
When I did this kind of comparison in the past, I found that:
– Income funds suffer from dividend drag. With quarterly dividends, dividend drag adds about 0.025% a quarter, annually 0.1% to the costs.
– The overall cost of income reinvesting can be high – you pay potentially FX fees, bid/offer spread, and trading fee on a quarterly dividend of about 0.4% (assuming 1.5% annual yield). Even with a £1 million portfolio, your quarterly dividends will only be about £4k, so if you hold one single ETF, your reinvestment costs might be £65 (1.5% fx, 0.1% spread, £5 trade). 70/4000 is 1.625%, which is high versus the 0% of an accumulation fund.
– being based in Luxembourg adds about 0.1% in costs versus Ireland, due to the different withholding tax rates. 30% versus 15% is a big difference, but the dividend yield on U.S. stocks is only about 1.5%, and only about 60% of the global market cap is U.S., so overall cost of U.S. taxation was more like 0.27% (Luxembourg) versus 0.14% (Ireland).
– the “all-world” index assumes worst case withholding taxes. A fund like VWRP/VWRL has 0% tracking error against the index, even though the OCF is 0.22% and there are additional transaction fees. This is possible because the fund is domiciled in Ireland and hence pays less withholding tax than the index assumes, and also the fund generates income by stock lending. This is good if your main consideration is accurate tracking of the index – you can track it exactly, even including fees.
– the costs of tracking that extra 10% or so emerging market are surprisingly high in an all-world fund. It’s not just that the OCF is higher, but also the EM transaction costs are higher too, and you pay the higher OCF over 100% of your investment, even though only 10% is emerging markets. If you buy VHVG (developed world) instead of VWRP (all-world), then you’re getting ~90% of the same stocks. To break-even on the higher costs, the emerging market has to outperform by ten times the cost difference (because of the 10%/90% split). iirc the extra costs were around 0.1%, so the break-even point was EM outperforming by 1% (being 10% of the portfolio means that a 1% outperformance increases the overall gain by 0.1%). Given that we have no rational reason to believe the emerging market will consistently outperform the developed world by 1%, then it can be hard to justify, unless you have a strong theoretical belief that tracking as much as possible is “the right thing to do”, and even here, there are structural problems – you’re not really tracking a national economy by tracking publicly traded companies, because the percentage of the market cap that is publicly traded varies in different countries – e.g. comparing the two biggest economies in developed vs emerging, China has more large companies in private hands, whereas in the U.S. almost all large companies are publicly traded.
@Chris makes goods points above. This is a pointless exercise if you don’t take tracking error into account. I did try having a look but I couldn’t find the data for the BNY Mellon US ETF. It does bring up some interesting points though.
It has always irritated me that VWRL has a much larger OCF than VWRD, but it really shouldn’t since the VWRL tracking error is so low.
“Plan B: avoiding US WHT with your SIPP” is not clear to me.
Let’s say I hold an accumulation global tracker in my SIPP (like SSAC.L), how can I recover the cost of US divided Tax?
@Giulian Buy a US listed ETF. Fill in an IRS form.
Unfortunately your broker isn’t going to let you buy the US listed ETF for reasons mentioned in the article.
Couple of thoughts:
1. I understood PRWU is the accumulating version of PRIW, which gets round the WHT issue. Am I missing something?
2. Both track a Solactive index, which I understood is much narrower than the FTSE or MSCI equivalents. Both ETFs have a relatively short history, which might be of concern given the size of the sum invested?
@Martin, 1. The fund still had to pay withholding tax on dividends it receives from the shares it holds, even if the fund itself does not pay out dividends. 2. I wouldn’t be concerned with the age of the fund. Amundi is the largest fund manager in Europe, and one of the largest in the world. There’s no reason to think they would be less reliable than Vanguard or any other fund manager. The index itself is just an algorithm of companies by market cap. The market cap is public knowledge, so I doubt it would make a difference whether it’s FTSE or Solactive or anyone else. The only real issue is that it makes it harder to compare performance between funds, if they aren’t tracking the same thing.
@Chris: I have my entire SIPP (over a million) in VWRP. Noted that I could save about £1,500/yr switching to VHVG – interesting and useful.
But I got lost in the weeds of the discussion about US dividend tax. Are you (and maybe Monevator) saying that use of VWRP/VHVG is attracting taxes that could otherwise be avoided?
Thanks
V
There is of course the GEISAC or Vanguard FTSE Global all cap fund which I think covers something like 98% of total global mkt cap and includes emerging markets and small caps in both developed and emerging markets. Charges are about 23 bps though and it is not an ETF, but for the most comprehensive coverage of the closest thing to true global market cap in one fund, it is hard to beat IMO.
In view of US witholding tax is
Invesco Markets PLC S&P 500 UCITS ETF Acc GBP (SPXP) a synthetic ETF better than Vanguard S&P 500 UCITS ETF USD Acc (VUAG) and
iShares Core S&P 500 UCITS ETF USD Acc (CSP1)
@Chris. There is not an insignificant difference between the MSCI World ex EM (MXWO) and the Solactive Index (SDMLMCUN). If we go back to 08/05/2006, the start date for the Solactive index, the total return is 309.49%. By comparison, the MXWO has returned 349.38%, 39.88% greater, equivalent to 59bp/annum running. There has been no 5 year rolling period where SDMLMCUN has outperformed MXWO. It consistently underperforms.
I would similarly note that the BNY Mellon fund used here, BKLC US, follows the Morningstar index MLPC. MLPC has underperformed the S&P500 by 172% over the past 20 years (381% v 553%), equivalent to 167bp running per annum (8.16% v 9.83%). BLCK has a tracking deficit vs. MLCP of 6bp/annum over its very short life so the final result could easily be 180%.
So, yes, these indices are highly correlated as one might expect but with 58% of US ETF equity assets in products costing 10bp or less and 76% in those that cost 20bp or less, index differences can now outweigh the impact from fund fees by an order of magnitude.
@Valiant, yes that’s right, Vanguard pay 15% withholding tax on U.S. dividends. About 60% of VWRP is U.S., dividend yield is 1.5%, so U.S. withholding tax on a £1m portfolio would be £1350/year.
@ZXSpectrum48k interesting, that’s a greater difference than I would’ve thought, but whether or not one index outperforms another is something that you’d only know with hindsight. Do you know what the reasons for the outperformance were? I’d guess either the difference isn’t real (e.g. they just make different assumptions about withholding tax), or one index had a larger concentration of U.S. tech stocks, or included some country that had done particularly well. But unless you believe that those countries or sectors will always outperform, then I don’t think past performance would be relevant in choosing an index now.
Another potential low-cost option to avoid withholding tax in a SIPP would be to buy futures. The costs of an e-mini future are incorporated in to the spread, which is about 0.006% a quarter. You can do this on Interactive Brokers. It think it would probably work out cheaper than a swap based ETF, but I haven’t directly compared them.
@ZX thanks, and good to see you back. That difference is significant, and represents a serious drag on such a portfolio. Clearly decisions about the makeup of indices etc have some relevance. Cheapest isn’t necessarily best!
@ZXSpectrum48k. This is an interesting observation about BKLC vs the S&P500. As far as I can tell, BKLC is just the top 70% of US stocks by market-cap, whereas the S&P500 is chosen by a committee: there are criteria for inclusion (like profitability, etc) and some effort to balance sector exposures (from memory). The S&P500 is therefore not a passive portfolio, it’s an actively managed portfolio. That way or may not be better (it’s certainly better in your sample) – but it’s not really true ‘passive’ investing.
@Finumus. If you are telling people that that buying an S&P500 tracker is not passive investing then I’d agree but I’d be in the minority on this site. More “passive” money is managed against the S&P500 than pretty much anything else. What about all those SPIVA reports where active is measured vs. passive where the passive index is an S&P index constructed exactly like the S&P500? So is that really active vs. active then? Let’s not go down that rabbit hole again.
Clearly this article is just showing how little you can pay for funds. Fair enough. My point is more than many people will naively assume that MLCP and S&P500 are similar (or that SDMLMCUN is the same as MXWO). They may well decide that the zero cost BKLC is better than the 3bp on say IVV US or 5bp on IUSA LN etc.
The reality is that you need to start with what index you want to track and then find one that tracks it well. Choosing the correct index and minimizing tracking deficit will outweigh costs when you are down in the weeds.
Moreover, nobody can actually run a fund for nothing. They should be asking how they cover the costs and generate a profit. What risks do they take with your capital to achieve that? We saw a good example of the problems that caused in the Gilt debacle in September 22. All those LDI and trackers got themselves in a right mess due to repo lending.
@ZX very interesting. There’s a popular perception that all indices are equal, which you helpfully debunk. Most of us mere mortals would struggle to access or understand the data, but clearly performance and, perhaps, security are affected.
The figures given by ZXSpectrum48k look suspicious to me. BKLC follows the Morningstar US Large Cap index, which is more of a “mega cap” index than the S&P 500 “large cap” index and currently tracks only the largest 211 US stocks. Despite the lower number of stocks, this should track the S&P 500 reasonably well, certainly not underperforming by 167bp per year. I don’t have access to a 20 year history for the Morningstar index, but over the last 10 years mega caps have outperformed the S&P 500 and the Morningstar index has outperformed the S&P by 14bp on a TR basis. I strongly suspect that the comparison is being made with the non-TR version of the Morningstar index as 167bp is similar to the dividend yield.
ps, I just looked up the Solactive Index (SDMLMCUN). This describes itself as a “Net TR Index”, which would usually imply return after some measure of dividend withholding taxes, so again I would be a little suspicious in comparisons with the MSCI Developed World index unless this was done with precisely the same level of witholding taxes. 59bp underperformance does not sound likely to me.
pps, yes here are some details of the Solactive Developed World Index https://www.solactive.com/wp-content/uploads/solactiveip/en/Benchmark_Statement_DE000SLA41D2.pdf
“The Benchmark is a quantitative and investable index developed by Solactive AG. The Benchmark is a net total return index published in USD. A net total return index seeks to replicate the overall return from holding a portfolio consisting of the index constituents. In order to achieve that aim, a net total return index considers payments, such as dividends or coupon payments, after deduction of any withholding tax or other amounts an investor holding the index constituents would typically be exposed to.”
It would be absolutely great to have that PRIIPS regulations removed. An actual tangible benefit of Brexit that would be something for the Brexiters to crow about!
Fortunately we invested in US listed ETFs before PRIIPS came in, but would like to buy more. Even outside a SIPP they are useful as you get a 15% tax credit on the dividend withholding tax that can be used to reduce UK income tax.
One argument for the Vanguard global ETF which charges 0.2%, is lower tracking error. Usually when I compare Vanguard capweight index funds vs their peers, the Vanguard funds have very little slippage against the benchmark. Such discrepencies would remove all the advantage of choosing a fund with a lower ongoing cost.
I come back to make one comment and Naeclue can’t help but tell me I’m wrong. BLKC started on 09/04/2020. As of 05/05/2023, it’s price return was 46.70%. It’s total return, inc reinvested dividends was 52.78%. Annual equivalent 14.80%
The Morningstar US Large Cap MLCP has a price return of 46.17%. Total return 53.20%. Annual equivalent 14.90%. Morningstar US Large Cap Total return index, MLCPT, price return of 53.20%, total return 53.20%. Annual 14.90%.
S&P500 total return index (SPXT) is 55.65%. Annual 15.50%. So MLCP or MLCPT has underperformed by SPXT by 60bp over a period of just over 3 years. That differential was much much larger historically. The differential between MLCP/MLCPT and SPXT has been narrowing because the market cap of the S&P500 is becoming more dominated by a smaller number of very large mega cap stocks. So the returns are converging to some degree.
Nonetheless, 60bp/annum over the past 3 years is (as I said earlier) an order of magnitude greater than the cost differential between BKLC and something like IVV, which is 3bp (0bp v 3bp). IVV has delivered 15.46%/annum over the same period, 66bp greater than BKLC. BKLC has a tracking deficit of 10bp/annum while IVV it’s only 4bp over the period.
These are not my calcs. These are straight from the actual funds and index providers. It’s all in Bloomberg, just look it up.
Anyway I’ll go back in my hole now.
@ZXSpectrum48k — Was very glad to see you back. I hope you don’t disappear indefinitely again.
@Naeclue — For background I feel I didn’t do a great job of moderating / intervening the last time you and @ZX had a debate, with hindsight somewhat clumsily associating myself with certain comments of yours that were arguably rather personal or at least intemperate.
I don’t see that particular issue here, but nonetheless it’s a shame to see two commenters who regularly add value potentially heading towards friction again.
Online discussion is a strange beast, prone to misunderstandings and misreadings of all sorts. It’s also difficult to moderate, beyond the obviously nasty / sweary stuff.
The best everyone can do is just state and discuss the facts as they see them, assume the other party is also acting in good faith, and leave it or ignore someone if they’re really not getting along/anywhere.
This is no judgement on this thread or the facts here (of which I’m ignorant) just a general pointer. Cheers!
@ZXSpectrum, the number I was questioning was 1.67% pa underperformance over 20 years, not 0.60% over 3, which is much more believable. The latest Morningstar fact sheet, 31 March 2023, gives MPLCT 1, 3, 5 and 10 year returns of -8.69%, 17.68%, 11.39% and 12.38%. That compares with the S&P 500 TR over the exact same periods of -7.73%, 18.55%, 11.19% and 12.24%. So yes, MPLCT has done worse over 1 and 3 years, but better over 5 and 10.
Over 10 years that gives 221% for MPLCT, 217% for the S&P. If your claim of MPLCT performance over 20 years is 381%, S&P 500 553% (underperformance of 1.67% pa) is to be believed, then that would imply 50% over the 10 years until March 2013 for MPLCT and 106% for the S&P. ie a difference of around 3.4% pa. As I said, I don’t have access to the 20 year return figure, but 3.4% pa underperformance of ~50% of the S&P 500 firms, ~75% by cap weight, stretches credulity even more than 1.67% pa over 20. This is why I suspect you may have compared the return of MPLC (price index) against the S&P instead of MPLCT (TR index).
Forgot to post this, MPCLT index page https://indexes.morningstar.com/indexes/details/morningstar-us-large-cap-FSUSA00KH5?currency=USD&variant=TR&tab=overview
I have just noticed that the MPCLT index page has a 15y performance figure of 9.67% pa. That compares to about 9.77% for the S&P 500, so underperformance of about 10bp pa. Over the long term I would expect the S&P 500 to do better due to the small cap effect, but that 15y performance makes the claim of 167bp underperformance over 20y look even more wrong. Interesting things happened over the 5 years to April 2008, but not that interesting.
It’s like Predator versus Alien but with numbers.
Seriously thanks both ZX and Naeclue for both adding tons of value.
Apologies if this is a silly question: am I right in thinking that 30% US WHT is paid on the US dividends in the Vanguard FTSE Global All Cap Index Fund GBP Acc, since that fund is domiciled in the UK (ISIN: GB00BD3RZ582); if so, is there a way for a UK investor holding that fund in an ISA to claim back 15% of the US WHT?
Many thanks!
@TI. Appreciate your comment but I don’t feel I can be bothered to argue with @Naeclue. I refuse to read anything he says. Unfortunately, this is not a forum so you cannot hide posts from certain members.
I just took the numbers from Bloomberg. Perhaps they are right or wrong, or perhaps right in some periods but not in others, or whatever. I cannot be bothered to check tbh. I’m just wanted to make the point that when you are down in the weeds, with costs stated at 20bp or less (76% of all US ETFs, only 5% now charge more than 60bp), it’s not clear that costs should be a big driver of your choices. Finumus was having fun seeing how low you could get it but it’s not transparent to me that when comparing an index with 500 constituents constructed with one set of rules with another with 200 constituents generated with another set of rules, that the returns will so comparable as to make costs differences relevant. Even the tracking deficit could swamp cost differences. Never mind the point that nobody, however big, can run a fund for 10bp. So what is the fund charging 0bp doing vs. a fund charging 10bp? It’s not cost cutting. Readers who might consider switching their investments probably should check they know what they are actually getting, rather than letting only costs or tax drive the decision.
Of course, Naeclue will tell me I’m stupid. As he has repeated so many times, everyone who has active investments like me is just an ignorant idiot. Cost and tax are the only thing that matter. At least I’m in a bigger club of idiots that now Finumus has told everyone the S&P index tracker is not passive. I have S&P trackers so I suppose I’m twice the idiot I was 48 hours ago. Then again according to Naclue if you have anything other than equities and cash you are stupid because I should be happy to endure a 30-50% drawdown or a 1 in 8 chance of another Japan where the real return after 30 years is -20%. Problem is I’m neither rich enough nor poor enough to risk that.
All those hedge funds I own are just the next LTCM despite the fact they all went through LTCM, 2008, and COVID and never seemed to lose any money as all. Probably all luck. Best of all, Naeclue has told me that yields are lognormally distributed. I sat there all that time looking at market quotes expressed as normvols. If only somebody had told me, they should have been logvols. The whole swaption market must have been wrong all that time.
@TI. It’s a fundamental disagreement over pretty much everything. It’s hard to bridge.
@Naeclue #25
Thanks for the heads up on a 15% tax credit being available on US ETFs outside an ISA. Interactive Brokers will allow you to cetifiy as MiFID Professional to avoid PRIIPS although the criteria are quite onerous: https://ibkr.info/node/3298
The 15% tax credit plus 7bps fee on VT make it tempting…
No question that below 15/20bps getting the tracking right is far more important. I personally buy the local currency vti/ veur/ chspi etc. Once you are in you aren’t exiting with cgt so best to choose a large etf/provider who is going to be around for the next 30y etc.
Yes to physical replication only (I can’t stop stock lending in the etf but don’t authorise it in my IB)
This way you never expose the local currency except when you withdraw. Hence separating distributions from spending. (IB has cheap margin loans if you don’t have cash at that time. If only they would release the Mastercard for eu/au custys would simplify the spending)
Thank you as always to Finimus and those erudite commenters – appreciate civil discourse, and learning and continue to be a humble student of the markets.
I’ll second that from @ TI.
I hope both these experienced commentators (@ZX, @Naeclue) keep posting. I understand they work (or have worked) in the industry and have a lot to offer. Even though I am a novice, I enjoy reading the comments and interesting observations from both (even though some of it flies over my head).
It makes for a better blog and not even us novices just want “invest in these few cheap index funds” through these few “cheapest brokers” whilst “living as frugally as you can” repeated all the time (although we do want that as well sometimes of course!) But there are the more experienced/advanced investors as well that like to read/debate something useful/interesting to them – even if that sometimes involves aspects of active investing (and even if this site is primarily aimed at passive investing for the majority of us mortals).
So I for one, think it’s good to hear all these commentators’ views and opinions as well as the facts – it adds to this site – it doesn’t take away from it and would be a poorer place without them. It’s good to have constructive debate and opinion and where people disagree then that’s fine – I agree it’s better when it doesn’t get personal though and can just agree to disagree and hopefully not fall out over it – now I’m a bit older with health conditions I believe life’s far too short for all that. At the end of the day we all, mostly, have the same aim – to have enough money to enjoy our lives to the full/live comfortably so we have more choices and can do the things we enjoy doing more – whatever they may be.
Also I’m not sure if it’s true, but it is said investing is more art than science even though it’s a numbers game and we can calculate, we can’t accurately predict most outcomes – otherwise we’d all be invested exactly the same.
So I for one hope you both, and others, use your experience and wisdom and keep posting your constructive perspectives and insight.
Many thanks.
@MountainCatharsis – the fund will claim back 15% withholding tax credit from the US authorities. In other words, they’ll pay your US dividends shorn of 15% WHT not minus 30%. There’s no more you can or need to do if your fund is in an ISA.
In a SIPP, with the right broker, you can get the remaining 15% back by filling in a form they provide for this purpose.
Re: MountainCatharsis. This is news to me as well, that US WHT is applying to index funds listed here in the UK and Ireland and not just to US shares one might not ever consider going near. Would the question of whether one’s platform enables one to claim back the final 15% of withholding tax within a SIPP not be worthy of mention within the Monevator broker comparison? I feel I must be miscalculating, but if Vanguard FTSE Global All Cap Index Fund for example is yielding 1.74% and 62% of that is North America (lets say USA) and 15% is not reclaimable via Iweb for example compared to say AJ Bell, assuming consistent dividends across countries, does that not fundamentally change one’s decision as to the transition point between what is a percentage fee and a flat fee platform?
@TI, I really thought I was discussing the facts and I will endeavour to keep doing that. I started by saying that @ZXs statement that the Morningstar US Large Cap Index (MLCP) had underperformed the S&P 500 by “equivalent to 167bp running per annum” looked suspicious and even offered an explanation for this that a genuine error had been made in looking up the price performance instead of the total return. But then we were presented with a change in the claim to “MLCP or MLCPT has underperformed by SPXT by 60bp over a period of just over 3 years. That differential was much much larger historically.” A very quick glance at the 5y and 10y relative performance figures is enough to show that the differential was absolutely not “much much larger historically”. I am mystified as to why he might say such a thing. The Monevator contributors and many of those who comment tend to be types who kick the tyres hard and are not be susceptible to gaslighting. Did ZX really think that no-one would check?
After providing the true facts on the performance differential, we then get a comment consisting of inaccurate and personal vitriolic slurs and yet more bluster. These are the tactics of politicians and others who cannot abide admitting to making a mistake or being wrong. Pathetic really.
@Naeclue — I agree with the first long paragraph, but not your second shorter paragraph. If you compare what you’ve written there with what @ZX wrote, I think you’re being more personal. (I don’t have any problem with you saying you think he’s wrong).
I agree his comments were not entirely neutral, with that said. Perhaps he is still smarting from ‘previous’.
Of course none of this is really the stuff of a hyper-offensive flame war. It’s not something I feel I can moderate away (you’re not swearing at each other or whatnot).
It’s just a great shame as you’re both such respected commentators here. Without the ‘calling me an idiot’ and ‘pathetic really’ aspects to these comments this is evidently a useful exchange, judging not least from what others have written in reply.
Of course we all do this now and then; I certainly have in response to some political comments. But I am in the uncomfortable role of ‘policing’ readers.
I’ll leave it there for now. Comments from both very welcome as always from my perspective. 🙂
@Accumulator “In a SIPP, with the right broker, you can get the remaining 15% back by filling in a form they provide for this purpose.”
I would just point out that this only works for US listed ETFs, which I am sure @TA is aware of. It will not work for the particular UK based fund mentioned by @MountainCatharsis. There does not seem to be any way of claiming back withholding tax paid by non-US funds, be they OEICs, ETFs or ITs.
As has been mentioned, the brokers offering to claim back the WHT in SIPPs are unfortunately not offering US listed SIPPs due to the PRIIPs regulations (this may change). The trick with swap based ETFs is a workaround, but as Finumus has said, swap based ETFs have other issues.
p.s. For the avoidance of doubt, I should be clear that I agree that most of the substance of your first paragraph seems fact-based, I am not expressing a view on the applicability of the term ‘gaslighting’ etc.
And as I said above, I have no view on the correctness of the data, I haven’t looked into it, and I don’t have access to a Bloomberg.
Unfortunately @TA has (understandably) declined to be drawn in on account of the heat here, either. Ho hum.
@TI, fair enough, I withdraw the “pathetic bit”.
ps I have not used Bloomberg, the information I have came directly from the Morningstar index page. S&P TR return data is widely available.
@Naeclue — Cheers!
It was fun to see Finumus drive down the taxes and charges to see how low it was possible to go, but I agree with @Max Sharpe and others in that it is not all about charges. That BNY Mellon ETF claims to have zero expenses, but it has underperformed its index by 9bp pa over the last 3 years. The very similar Vanguard Mega Cap ETF (MGC) has a TER of 7bp, but has only underperformed its index by 7bp pa over 3 years. This is not a fluke either as the same behaviour is seen across Vanguard’s ETFs, with the tracking difference on cap weighted funds being close to and sometimes less than the expense ratio. Eg the Vanguard Total Stock Market ETF has a TER of only 3bp, but has consistently underperformed by only 1bp.
Clearly there is more than meets the eye with BNY Mellon’s zero charges. Fund managers have historically been ingenious in finding ways of extracting money from our wallets without us noticing. This may be happening here, but it could be that Vanguard are just more competent at this game. There was an interesting article from Vanguard a few years ago which went into some detail about how Vanguard manages its tracker funds. In summary, a fair amount of activity is required to passively track an index! It is not straightforward to do this well.
iShares are like Vanguard in achieving consistently low tracking differences, but in their case the results are achieved with the help of higher levels of stock lending. Personally I am comfortable that iShares handle this competently and am prepared to invest in some of their ETFs.
It will be interesting to see how some of the low charging Amundi and L&G ETFs perform once we have more history. Until then I will be mostly sticking with Vanguard and iShares.
Regarding the discussion between S&P 500 and other indexes, I am going to put a link that I found in one of the Monevator weekend reads:
https://www.evidenceinvestor.com/sp-and-msci-us-indices-why-the-difference-in-performance/
> Differences in index construction have meant that S&P DJI indices have historically had a higher exposure to the quality factor than their MSCI counterparts. For example, the S&P Composite 1500 requires, among other criteria, potential new index additions to have four consecutive quarters of positive earnings to be considered for eligibility. The MSCI ACWI USA Indexes have no such requirements.
ZXSpectrum48k is right in pointing out that the S&P 500 is not passive. The committee is paid to take decisions which maximise the returns of investors. The most recent example is the addition of dual-class stocks. Leaving you with Matt Levine’s commentary:
https://archive.ph/PXnpB#selection-4195.0-4195.16
> In 2017, investors noisily complained that they were being forced to buy dual-class stocks, so S&P kicked the dual-class stocks out of the indexes. In 2022, investors noisily complained that they were being forced not to buy dual-class stocks, so S&P let them back in.
@ Naeclue – good point about the SIPP workaround no longer applying – my bad.
@ TI – I guess the fundamental question I have about any index advantage is: is it structural? Or is it just a lucky sequence that will be reversed? Probably at the moment I decide to buy in 😉
For example, I’ve waited for years for my risk factor holdings to come good even though there is a very convincing underlying rationale for them. Still being spanked by a vanilla index. Does that mean value is dead? Or just sleeping? I try not to lose sleep over it, anyway.
There are two unmentioned advantage of swap-based funds over replication Acc funds outside the ISA. 1) We pay any CGT on the total return (saving like 80bps on divi tax). 2) There’s no need to do the legwork to find the dividend you’ve accumulated for your tax return (I’m sure you’re all doing that btw).
What’s the best way to get total global equity exposure through swap? Any knowers?
@Alex, yes different ways of constructing an index will inevitably result in differences in performance as indicated in the article. I note that there are no 20 year differences of 167bp pa though!
in truth there aren’t any index constructions that are totally passive. They all filter to some extent to create their “investable universe” and even cap weighted indices adjust the weight according to the free float. The S&P construction approach is definitely towards the more passive end though, capturing most securities that you would expect them to and adopting free-float cap weighting. It is not as though you have a committee saying they will overweight Microsoft compared with Apple because they think Microsoft will outperform. If the S&P filtering results in a small quality tilt, or even a small value tilt, that’s fine by me. Not too much though, as the factor tilt is an active decision I would like to get wrong all by myself;)
I have never particularly liked the terms “passive” and “active” as to me that indicates a level of trading. Passive is used to describe something I would call rules-based or systematic. Active investing involves decision making. I prefer this stock to that one, etc. Something like a momentum index can involve a lot more trading than many so-called active funds go in for. Warren Buffett is an active investor, but he can sit on investments for decades. Free-float, broad cap weighted indices like the S&P 500 produce returns that are close to “market” returns and it is these market returns that I am mostly after.
@The Accumulator “For example, I’ve waited for years for my risk factor holdings to come good even though there is a very convincing underlying rationale for them. Still being spanked by a vanilla index. Does that mean value is dead? Or just sleeping? I try not to lose sleep over it, anyway.”
Yes, thoughts I have every so often. To date my factor tilts have been worse than useless. I just keep telling myself that risk factors are not guaranteed to be positive all the time and I have just been unlucky so far.
This is one of the dilemmas when it comes to active choices. If we just went after market returns via a cap weighted tracker we would never be disappointed and less tempted to throw in the towel.
@Ben “There are two unmentioned advantage of swap-based funds over replication Acc funds outside the ISA. 1) We pay any CGT on the total return (saving like 80bps on divi tax). 2) There’s no need to do the legwork to find the dividend you’ve accumulated for your tax return (I’m sure you’re all doing that btw).”
I hate to break it to you Ben, but this is not true. In general synthetic or swap based ETFs do produce taxable income. Even if you have an accumulating ETF it will still have “excess reportable income” that you need to report in your tax return. Unless of course your ETF does not have UK reporting status, which is often worse as any capital gain you make will be taxed as income.
The only exception I know of is the iShares S&P 500 ETF I500, launched in 2020. This is swap based, UK reporting and so far has reported zero excess reportable income.
@Naeclue hey thanks for the help. Looking at the swap ETFs I own, the excess reporting income is a few cents on a share price of 20 bucks so the divi tax saving is still there. The ball ache saving is very much not there however. The thought of finding all these figures and then figuring out how to include them in my taxes is putting me right off the idea. Perhaps I’ll go with the I500 you mention.
@Finimus mentions that unfortunately the Amundi Prime Global UCITS ETF DR doesn’t have a GBP accumulation version. Why does it matter if the accumulation version is denominated in USD, please? I thought this Monevator article (https://monevator.com/currency-risk-fund-denomination/) explains that all the matters is the currency of the underlying assets, which wouldn’t change.
Vanguard tell me that a Vanguard fund held in their SIPP avoids US dividend witholding tax.
@brian1155818 If that were true, then a Vanguard fund held in a Vanguard SIPP would outperform the same fund held in a Vanguard ISA. That doesn’t happen – the performance of the fund is the same regardless of whether it is in a general trading account, ISA, or SIPP.
Might be posting into the void here, as the last comment was nearly 4 weeks ago, but in the hope that someone may read this…
Just reread this article, & this time around read through all the comments.
Wanted to give a big thank you to all the commenters, especially @Martin T (#9), @Chris (#5, 10 & 16), @ZXSpectrum48k (#14 & 20), @Finimus (#19) & @Alex Palcuie (#47) for highlighting, discussing and explaining the performance issues between indices, in particular between the index used in PRIW/PRWU (Solactive) and the MSCI World ex EM.
I was shocked by the size of the disparities having quite wrongly assumed that the choice of which world or country index to track was not a big issue for LSE listed ‘plain vanilla’ trackers.
Agree with what @ZX says about ‘active’ & ‘passive’ being a poor set of labels here (neither being accurate, nor explanatory).
The astrophysics, astronomy & cosmology communities are in the process of retiring the (meaningless) initially chosen phrase ‘Dark Energy’ in favour of the succinctly descriptive, more accurate & explanatory label ‘Smooth Tension’. Where the label doesn’t fit the thing being identified then we should also try, in the PF and FIRE communities, to find something both better suited (i.e. accurate) and more useful (i.e. descriptive and explanatory).
Also grateful to @Finimus for identifying & quantifying the US WHT implications. Although I knew about the issue and the SIPP workaround, I hadn’t appreciated the full extent of the problem in an ISA (i.e. 19 bps).
I have a bold proposal for @TI & @TA for the next update to Monevator’s cheapest tracker ETF list; namely, is there a realistic and practical way to identify on that list:
a). Whether or not the ETFs are swaps based, and so avoid US WHT?
b). Which actual precise index they each track (& perhaps any known, noteworthy and easily summarised performance variances between those indices)?
Just ETF has a list of UCITS equivalents to US listed ETFs here:
https://www.justetf.com/uk/academy/us-etfs-how-to-buy-the-best-equivalent-etfs-in-the-uk.html
HL now listing a few low fee (5-7 bps/0.05-0.07% p.a.) JPM Betabuilders ETFs in US short T-Bills, US Equity (‘Morningstar US Target Market Exposure Index’) and UK short gilts. Nothing yet for Canada 🙂
Got my USD dominated dividend today from iweb on PRIW. Quote from the website;
“The Foreign Exchange rate used to convert your Net Dividend Payable to sterling is an overnight rate from our provider Interactive Data. This rate is a mid-rate, averaged from the latest spot rates quoted by at least 3 approved international financial institutions. The rates are sampled at 4pm on the working day previous to the dividend release.”
Looking at the FX rate, I got 1.2699 USD = 1 GBP which looking at the midmarket rate at 4pm on Friday at 4pm is exactly midmarket – which is a real surprise.
It’s a very minor detail but I think an interesting datapoint.
Thanks for the article and all the comments, great info there.
When comparing performance of ETFs tracking the same index the charts state the TER is included in the price and therefore the performance figures.
Can we assume that the performance of an accumulating ETF includes the price increases due to dividend reinvesting, and that where US shares are held and their dividends reinvested the effect (or not) of WHT is also included in that price/performance?
If so then, to find the most cost efficient ETF for a given index, can we ignore TER and ‘Luxembourg vs Ireland WHT’ and just look at comparative performance? That will also include tracking accuracy but do we care to split that out as long as we’re getting the best return?
From reading the above comments I gather that being held in a UK SIPP is irrelevant to WHT.
For reasons which are best known to themselves, Hargreaves Lansdown have the SPX.L ETF (the Invesco swaps based UCITS S&P500 tracker, as referenced in @Finumus’ excellent article) down as having the ‘ticker’ SPX.P.
Of interest is that Xtrackers have just listed a World ex-US etf (EXUS) with a TER of 0.15%. Good on one hand for simplicity (choose your Swap-based US/ non-swap ex-US proportions as you wish, avoid WHT as you do so, and end up with a TER at or about 0.1% – and it’s accumulating so no dividend FX issues) – BUT – it’s listed on the LSE in USD only so difficult to avoid exchange fees on the way in unless you already hold some USD cash, except you can’t hold USD cash in an ISA… (although I’ve found in the IBKR ISA they wont exchange your USD cash back to GBP until the end of the day, so you can sell something in USD and buy something else the same day in USD without incurring exchange fees). I can’t see UK reporting status explicitly mentioned, but as an Ireland domiciled etf, it is surely going to be UK reporting, right…?