Cost is one of the best predictors of return [1] (low = good), so you might think we’d be filling our boots with the new Lyxor [2] Core ETF range.
This is a family pack of plain vanilla [3] 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 [4] 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 This is good news, and means this snag versus the competition is no longer applicable.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 [5], 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 [6]. Or worth the risk of being out of the market [7].
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 [8].
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 [9] 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 [10]:
- Income tax is much higher for most people than capital gains tax [11] (CGT).
- Your tax-free £11,700 CGT annual allowance does not apply.
- You can’t use capital losses elsewhere to offset [12] 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 [13]!
The reporting fund status of each Lyxor ETF is stated on its individual webpage [14]. 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 [15].
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 [16] 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 [17].
In contrast, most Irish (and UK) funds are able to claim back 15% withholding tax [18] 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 [19] 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 [20]
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. [↩ [25]]
- Everyone’s exact tax situation is different, so we can only talk in generalities here and throughout this article. [↩ [26]]
- 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. [↩ [27]]