Cost is one of the best predictors of return (low = good), so you might think we’d be filling our boots with the new Lyxor Core ETF range.
This is a family pack of plain vanilla ETFs with fund expenses so low that you wonder if Lyxor still employs any humans.
£10,000 in a Lyxor UK index tracker now only costs you £4 a year to own, at the headline Ongoing Charge Figure (OCF) rate of 0.04%.
Compare that with the £100 a year you’d pay if you had the same money stuck in Virgin’s notoriously expensive UK tracker cum customer inertia trap.
Price war over – back up the truck?
Not so fast.
War! What is it good for? (Costs now nearly nothing…)
First let’s compare the Lyxor range on OCF versus its nearest rivals.
[Update: 6/7/2018: Note since this article was published, Lyxor tells us these ETFs have been granted UK fund reporting status. This is good news, and means this snag versus the competition is no longer applicable. Always check individual fund fact sheets with any investment to be sure.]
Here’s where Lyxor wins or ties for the no.1 spot in the main equity categories (note: bold type is just for easy reading):
| Fund | UK | US | Europe | Japan | World |
| No. 1 or tie | Lyxor Core M’star UK ETF | Lyxor Core M’star US ETF | Lyxor Core EURO STOXX 300 ETF | Fidelity Index Japan P | Lyxor Core MSCI World ETF |
| OCF (%) | 0.04 | 0.04 | 0.07 | 0.1 | 0.12 |
| UK* reporting fund | No | No | Yes | N/A | No |
| No. 2 or tie | iShares UK Equity Index Fund D | HSBC American Index Fund C | HSBC European Index Fund C | Lyxor Core MSCI Japan ETF | Fidelity Index World P |
| OCF (%) | 0.06 | 0.06 | 0.07 | 0.12 | 0.12 |
| UK* reporting fund | N/A | N/A | N/A | No | N/A |
*UK reporting fund: A ‘No’ in this column is a big concern if the ETF is held outside of your ISA or SIPP. Yes or N/A means there’s nothing to worry about. “M’star” = Morningstar.
And here’s where Lyxor wins in UK government bonds categories (no pesky ties):
| Fund | All-Gilts | Short Gilts | Index-Linked Gilts |
| No. 1 or tie | Lyxor Core FTSE Actuaries UK Gilts ETF | Lyxor FTSE Actuaries UK Gilts 0-5Y ETF | Lyxor Core FTSE Actuaries UK Gilts Inflation-Linked ETF |
| OCF (%) | 0.07 | 0.07 | 0.07 |
| UK* reporting fund | Yes | Yes | Yes |
| No. 2 or tie | Vanguard UK Gilt ETF | SPDR Bloomberg Barclays 1-5 Year Gilt ETF | Vanguard UK Inflation Linked Gilt Index fund |
| OCF (%) | 0.12 | 0.15 | 0.15 |
| UK* reporting fund | Yes | Yes | N/A |
*UK reporting fund: A ‘No’ in this column is a big concern if the ETF is held outside of your ISA or SIPP. Yes or N/A means there’s nothing to worry about.
Should you switch?
On costs, the Lyxor Core ETFs now own the joint. They’ve even cut a third off annual fund expenses in intensively competitive markets like UK and US equities.
That’s impressive.
Yet the truth is the savings are negligible if you already own a rival cheap tracker that slashes costs like Freddy Krueger slashes screaming teens.
For every £10,000 of fund you own, each 0.01% OCF reduction saves you £1 per year.
Switching to Lyxor’s UK ETF might save you £2 over the next 12 months if you already have £10,000 in an iShares UK Equity Index Fund, for example. (Assuming the latter maintains its 0.06% OCF. This example for training purposes only. Terms and Conditions apply.)
I’ve heard of the miracle of compound interest, but you’ll struggle to get many loaves and fishes for that money, even years later.
Don’t get me wrong – I’m not suddenly saying costs don’t matter!
But there comes a point where even Martin Lewis wouldn’t get out of bed for the savings.
If you’re already in a competitive tracker, consider whether switching is worth your time. Or worth the risk of being out of the market.
Even if you can switch in the blink of an eye between two ETFs then it could still take you years to make back the cost of a couple of trades, depending on how much you’ve invested.
New money doesn’t face this switching cost, of course.
But there are a couple of other stink bombs to watch out for…
Pong! UK reporting fund status
[Update 6/7/2018: Since this article was published, Lyxor tells us it has subsequently been granted UK reporting fund status as expected. This section is therefore no longer applicable and this wrinkle goes away. Always check individual fund fact sheets with any investment you make to be sure.]
The UK, US and World Lyxor ETFs do not currently have UK reporting fund status.
That’s potentially a problem if you plan to own them outside of an ISA or a SIPP – although hopefully this situation will soon be resolved.
What’s the beef?
Lyxor’s Core ETFs are based in Luxembourg.1 That makes them offshore funds.
If offshore funds do not have UK reporting fund status and they aren’t in your tax shelters (ISAs or pensions) then any capital gain you make on that fund is taxed as income rather than capital gains when you sell.
That’s usually bad for three reasons2:
- Income tax is much higher for most people than capital gains tax (CGT).
- Your tax-free £11,700 CGT annual allowance does not apply.
- You can’t use capital losses elsewhere to offset the gain.
A basic rate taxpayer would pay 20% tax instead of 10% on any capital gain over zero if they sold an un-sheltered, non-reporting fund.
Avoid that scenario like Novichok!
The reporting fund status of each Lyxor ETF is stated on its individual webpage. It’s easy to miss because they’ve used the obscure acronym ‘UKFRS’ to indicate UK Reporting Fund Status. Cheeky.
The good news is this is likely a temporary situation.
Lyxor tells us it applies for UK Reporting Fund status on all LSE listed funds as a matter of course, but that it can take some time for status to be granted. Typically three months or so.
For what its worth, it also says investors needn’t worry if they trade in the meantime, because reporting status applies historically once granted.
But we’d probably err on playing safe and waiting until status is officially granted if you’re buying outside of an ISA or SIPP.
(If you are buying the ETFs tucked safely away in a tax shelter, then “no wuckers”, as Australian bartenders enigmatically say, as then the entire matter is irrelevant.)
Nose peg! Withholding tax
You also need to watch out here for withholding tax.
Stealthy as a pickpocket, withholding tax lightens the income you receive from overseas.
For example, if you directly own US shares, then Uncle Sam docks you 30% of your dividends in withholding tax before the money makes it over the border.
Fill in the right form and you’ll only pay 15%. That’s because HMRC are next in the queue, and a double-taxation treaty exists between the US and UK to stop you being spit-roasted between two taxmen.
Funds also have to pay withholding tax if they hold foreign securities. So the overseas dividends and interest paid to you come pre-shorn of withholding tax.
You can’t escape withholding tax levied on the fund no matter how roomy your personal tax shelter.
This applies to ETFs based in Luxembourg and Ireland even though you may have heard they’re a withholding tax-free zone.
While it’s true withholding tax is not levied on dividends and interest repatriated to the UK from those territories, the reality is that funds have already paid withholding tax on income they’ve earned in the US, Japan, Australia or anywhere else they hold foreign securities.
Where’s all this leading? Well, it appears Luxembourg-based ETFs such as Lyxor’s may not enjoy the same tax treaty privileges as Ireland or UK-based funds.
For example, the US whacks Luxembourg funds for the full 30% withholding tax charge according to this KPMG research.
In contrast, most Irish (and UK) funds are able to claim back 15% withholding tax in line with their country’s double taxation treaties with the US.
Lyxor has confirmed to us that dividends on its US equity fund are paid after 30% withholding tax. The company notes that US shares aren’t typically high dividend payers anyway – especially at the smaller end of the market touched by the longer reach of the Lyxor US fund, which goes beyond the S&P 500. And there are also question marks as to how long the current withholding tax regimes in other territories will last.
So one could perhaps argue that the small tail of withholding tax shouldn’t wag the investing dog here.
Still, do the sums and you’ll see that in the case of US equities, a 15% bigger bite out of your dividends could easily overwhelm the slim 0.02% OCF advantage of the Lyxor ETF – depending on how dividend-heavy the returns from its Morningstar index turn out to be.
Buyer be aware
So the situation requires more awareness than a mindfulness course.
And you may well need a mindfulness course to heal the psychic trauma inflicted by wading through this lot.
For sure, I couldn’t be happier that funds this cheap have come to the UK market, despite my laundry list of “Ah, buts…”
It’s just that there’s more to choosing an index tracker than a waifish OCF.
We haven’t even gotten into the fact that the index of the Morningstar UK ETF tracked by Lyxor is only 81% UK. 9% is Dutch, nearly 3% Swiss and 2% US!3
More reassuring is that the Lyxor ETFs don’t do securities lending and they do fully physically replicate their indices.
Gilt-y pleasure
The case is much more straightforward for Lyxor’s UK Gilt ETFs. They cost around 50% less than their rivals and aren’t troubled by withholding tax / reporting fund doubts.
Hurrah!
And regardless of whether the equity ETFs tally with your personal situation, they’ll hopefully pressure other fund providers into following suit and taking costs even closer to zero. That way we all get to keep more cash in our pockets.
Take it steady,
The Accumulator
- You can tell because their ISIN codes begin with LU for Luxembourg. IE = Ireland, GB = UK, FR = France. [↩]
- Everyone’s exact tax situation is different, so we can only talk in generalities here and throughout this article. [↩]
- This mix may in part reflect the index tracking the overseas alternatives of FTSE giants, such Royal Dutch Shell or Unilever. Either way it’s another thing to be aware of. [↩]
Comments on this entry are closed.
Great article. How about tracking error? Presumably some firms (Vanguard?) are more skilled than others in their attempts to match indices as closely as possible?
Why is it good that they don’t do securities lending? Surely this is free money to the investor.
@john
Like any form of lending securities lending is fine until your customer runs into trouble; then it becomes your problem. There is no free money you are being paid to take a credit risk on the stock borrower and the value/liquidity of the collateral they have posted. Most of the stock borrowers are hedge funds. Most hedge funds use leverage.
Also the firm holding the collateral on the fund’s behalf can go bankrupt, e.g. Lehman
https://www.ft.com/content/d4706b0e-e40a-11e7-a685-5634466a6915
Given withholding tax, how does one choose between UK trackers and more diversified global ones?
I clicked through to Lyxor. “Page not found”. Sub-TSB, I suppose, but hardly encouraging.
@dearieme — Hmm, so it does, that’s disappointing. Not sure if their URL has changed, if we put the wrong one in, or if it’s something to do with that pop-up box that asks you to confirm your investor status. Have asked @TA to double-check.
Thank you, TA, for your post. (I should have said that earlier.)
@John – As Neverland says, the issue is that you introduce yourself to counterparty risk (that the lendee goes bust whilst borrowing the shares). This kinda thing happened in the financial crisis where some markets wen’t clearing and Lehman went under.
Things are much better now, there’s more regulations on this type of thing. Generally speaking, securities lending goes through a few very big agents: State Street, Northern Trust, BNY Mellon, Blackrock and JPMorgan Chase. They contract with the lenders through a GMSLA (Global Master Securities Lending Agreement). The agents then in turn lend out to the borrowers.
You can find out more on the International Securities Lending Association (ISLA) website: https://www.isla.co.uk/industry-guides
There can be “free money” not related to credit risk. You just have to be holding a stock everyone is so desperate to short they’ll pay a premium to borrow it (think Snapchat or the various companies which announced they’re moving into “blockchain”).
Fidelity are launching their own Irish-domiciled ETFs.
Fidelity S&P 500 Fund 0.06%
Fidelity MSCI Europe Fund 0.10%
Fidelity MSCI Japan Fund 0.10%
Fidelity MSCI World Fund 0.12%
Fidelity MSCI Pacific ex-Japan Fund 0.13%
Fidelity MSCI Emerging Markets Fund 0.20%
So compared to Lyror an EM ETF, cheap Japan fund and matching the MSCI world fund
Thanks Adrian, will be looking out for those.
@ Orson – do you mean how do I choose between a tracker that invests in the UK versus the World? Or do you mean where they’re domiciled?
If you mean the former, then forget withholding tax as a factor in that decision. That’s the tail wagging the dog:
http://monevator.com/asset-allocation-construct/
@ Sam – agreed but it’s hard to get reliable data. Ideally you have at least 5 years and can make an apple-to-apples comparison.
@ Dearieme – That link should work if you tick the ‘Pro investor’ box. Also, you’re welcome 🙂
@dearieme @all — We’ve switched the link to one that should work if you tick the private investor pop-up box. (And I’ve sent @TA a copy of the Icarus myth for pondering. 😉 )
Suffering a 30% withholding tax on US share dividends instead of 15% is a huge deal breaker. Vanguard Total Stock Market ETF, listed in the US, has a historic yield of 1.8%. 15% of that means an additional 0.27% compared to an Irish or UK domiciled fund. That holes the Lyxor US ETF below the waterline as far as I am concerned.
The European ETF misses out on Swiss shares, unlike the HSBC fund, but the Lyxor Core STOXX Europe 600 ETF looks interesting as it is much broader than just the Eurozone, taking in UK shares as well. I wonder how efficient that is with respect to withholding taxes when compared to Irish or UK domiciled ETFs/funds?
I agree that the competition from Lyxor, Fidelity and also X Trackers faced by Vanguard and iShares is to be welcomed and hopefully that will stir them to cut their charges.
The Lyxor ETFs all seem to be accumulating. For those of us drawing an income from our investments this is a little inconvenient, although more efficient for those reinvesting dividends. Accumulating funds are a pain to hold outside tax shelters as well as it complicates the tax calculations.
The link took me to the Lyxor Essentials range by the way instead of the Core range.
Isn’t the trouble with Irish funds that the 15% withholding tax for US holdings is irrecoverable as a UK tax payer as we don’t see the withholding tax directly. If you hold US ETFs directly the withholding tax can be offset against our tax liabilities which means we effectively receive 100%.
I’m not sure how it works if the ETF or OEIC is UK based. Is it the treatment the same as Irish based? I assume Investment Trusts can offset withholding tax against corporation tax.
Assume nothing with tax! As a UK taxpayer, you can’t offset withholding tax against your UK dividend income tax bill – should you have one – if you haven’t been charged that tax directly i.e. at the investor level rather than the fund level. That’s not an issue unique to Ireland based ETFs. US based ETFs have been taken off sale by brokers operating in UK and Europe due to new PRIIPs regulations that came in Jan 1. You may still be able to buy them if you can prove yourself a ‘sophisticated investor’ to brokers who allow that exception.
@all – Re: The link, I’ve changed it to the Lyxor home page. The issue seems to be that when you select Private Investor some of these ETFs and the pages about them are somewhat hard to find (if not hidden) on the site.
We have no idea whether this is deliberate or a dubious piece of web design, but if you hunt around as a Professional Investor you are more likely to find what you’re looking for.(Not that we would condone ticking the box saying Professional Investor instead of Retail Investor to do so, of course. Not at all.)
If the Core ETF information moves to somewhere more visible and someone notices and alerts us here, we’ll change the link again.
Sorry about the confusion!
Excellent article as always.
I have a question which is not related to the article but think you might have an answer as this blog is a gold mine for any investor. I will soon move from the UK to Asia (I’m originally from France). I have my investment with Cavendish ( Fidelity) but they don’t allow non resident to trade. I have tried to find a broker which does but have not been able to find one. Would you be able to recommend a broker for a soon non UK resident?
Thanks
@Sebastien — Unfortunately we’re not experts in this area, although we’re asked about it a lot. However we did create a post that might help you find the answers. (Read the comments, too).
http://monevator.com/expat-investing-and-tax-us-and-uk/
I wonder if we can expect to see some ETFs from Legal & General in the near future:
http://www.lgimetf.com/institutional/uk/en-gb/lgim-and-canvas.aspx
@Sebastien – Fidelity may not allow non-residents to trade or add new money to the account, but they will allow you to keep the funds that are already invested and sell holdings for cash when you wish to do so. If you have the funds invested in SIPPs or ISAs, then keeping them where they are may or may not be beneficial to you.
First you need to come to a view whether it is or it is not. It depends on which country in Asia you’re moving to, and whether or not that country is your final destination. When you move to a new country you may become tax resident there, which means paying tax on your global income, but there are outs. E.g. in some places, until you become a permanent resident for immigration purposes, you can get a non-dom tax status provided you can prove that your “permanent home” is someplace else (that may be different from being tax domiciled in the place of your permanent home). This may or may not change with the type of visa you have, if you’re married to a local, or even if you buy a house there. Get your relocation advisor to talk you through the options. If the Unspecified Asian Country in question is a temporary berth and you’re on a business visa, it may be beneficial to go for a non-dom tax status. You may or may not have to prove that you are actually tax domiciled someplace else (in some cases you can be a non-dom everywhere, which means that you only pay tax on the local income in both Asia and the UK, which eliminates the need to consider double tax treaties and such).
If you do end up paying tax on your global income in Asia, they will probably not have a mechanism to honour any tax exempt or tax deferred status of your SIPP/ ISA investments. That’s bad. Find out what their tax rules are and if there’s a tax treaty. Depending on what you find, you’ll probably want to avoid crystallising any tax liabilities in the UK if you can.
Consider what you’re going to do after Asia. The tax rules of your final destination may be more confiscatory than in either the UK or your Unspecified Asian Country.
Yeah, trotting around the globe is great when you have no money, otherwise it’s a pain in the backside.
Thanks for the post. I’ll have a look at it.
Thanks for your very complete response.
The country is China which obviously does not help as an expat. I have no intention of staying in China for over 5 years and will probably be moving to Spain or Latin America after working in China. I will not come back to the UK either ( Brexit) but will keep my UK bank account.
I’ll have a look at my tax liability in China.
Thanks again
@ TA – Thanks: I meant investing in either the UK or the world, a choice in which, as you say, withholding tax is relatively unimportant.
Thanks, another great and well researched article!
Would be great to have an article on the internal costs that ETF & index funds have beyond the OCF that may or may not be included in the tracking error. Really appreciate your insight on investing matters, I’ve learnt more here than on all the other investing sites I spend time on. Should be standard reading for newbie investors.
@Sebastien : I note Alliance Trust Savings’ dealing accounts charging schedule certainly includes mention of the case “Where you are a non-UK tax resident or your permanent address is not in the UK”… however it means they’d hit you with a “Supplementary Account charge” of £375 (on top of their usual £10/month for a dealing account), which would be a bit of a drag unless you have a nice big portfolio. The fact they feel they have to charge that much more probably implies there is some extra regulatory work involved for them, which is probably why most brokers don’t offer it at all. However, if you’re doing the expat thing it might be better/cheaper to use someone not in the UK at all for example Internaxx (used to be called TD Direct Investing International).
…that’s £375 per year, just to be clear!
Sebastien
As an expat the best broker I have found to trade UK/ETF’s shares is De Giro. They also allow trading in international shares. As long as you have a UK “mainland” bank account through which payments are made you can do the “know your client” online very easily, and their charges are some of the cheapest around (no annual fee).
They don’t do SIPPs/ISA’s but as a non resident you are not entitled to these anyway.
Good luck in China. Its a great country to live in at the moment (Beijing pollution aside)!
Thank you all for your comments. I’ll look into DeGiro as well as Internaxx. I have to say that I did not think it would be an issue to move abroad and keep my Cavendish account.
@HK expat: yes I am a bit preoccupied by the pollution (I’ll be in Hebei province …) But I guess China will be fun.
People always forget to include the cost of the spread when looking at ETFs.
@TI – Quick correction for you – the Lyxor Core Eurostoxx 300 is in fact *600* not 300, as Naeclue observes. Thanks for bringing my attention to it!
They have 3 core European ETFs:
Lyxor Core EURO STOXX 300 (DR) – UCITS ETF Acc
Lyxor Core STOXX Europe 600 (DR) – UCITS ETF Acc
Lyxor Core EURO STOXX 50 (DR) – UCITS ETF Acc
All 0.07 OCF. I simplified the table by focussing on one.
I chose the 300 because the 600 is 25% UK. The 300 and the 50 are only 3% UK but the 300 is broader.