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Oh god, what now? What now is Section 899 of the One Big Beautiful Bill – Trump’s monster-truck ‘tax and spend’ act currently bouncing around the halls of Congress.

Section 899 has been dubbed a ‘revenge tax’ because it targets individuals, corporations, and governments of foreign countries who are deemed to be hitting US entities with ‘unfair foreign taxes’.

Foreign countries like China, North Korea, and that island where all the tariff-loving penguins live, right?

Not necessarily. Quite possibly foreign lands like the UK, the EU, Australia and Japan. Plus anyone else who perhaps had Big Tech in mind when they drew up undertaxed profits rules (UTPRs), digital services taxes (DSTs), or diverted profits taxes (DPTs).

How does Section 899 affect ME?

Yes, I hear you.

The most likely impact at the time of writing is that you, an individual resident in a major US trading partner and ally, quietly building up your nest egg chock full of American assets, could be on the hook to pay a higher rate of US withholding tax (WHT).

There could be other spillover effects too but I’m going to concentrate on the most immediate – and talk about how you could mitigate the worst, should it happen.

Currently, withholding tax is due on income paid by US assets to overseas owners.

Many Monevator readers already pay withholding taxes on US equities and bonds1, although that’s not always apparent.

For example, a non-US domiciled fund will pay withholding tax on your US income before distributing the balance as dividends or interest (or reinvesting the cash back into the fund.)

That’s so much background. The nub of the problem is that anyone paying US withholding tax – whether directly or indirectly – could be in the firing line.

WHT? WTF more like

The main rate of US withholding tax is 30%. It’s levied on income, not capital gains.

Right now, you’re typically in for 15% WHT on US securities held via an Irish-domiciled fund or ETF. You get 50%-off the main rate due to a Double Taxation Agreement (DTA) that exists between the United States and Ireland.2

UK domiciled funds also qualify for the 15% withholding tax rate. Mighty Blighty has a deal with Uncle Sam, too.

Fund managers have to actively claim the rebate, which I imagine is much like wangling a gift voucher out of your mobile phone provider: “Only valid when accompanied by an original receipt, recent dental X-ray, and proof of being heir to the throne…”

It’s commonly accepted that Irish ETFs only pay 15% WHT but it may be worth checking the specifics if you invest in another type of fund.3

Got a portfolio of individual US stocks? Then fill in a W-8BEN form to reduce your WHT rate to 15%.

Ideally hold your portfolio of Made In America assets in a pension or SIPP. Choose the right platform and your SIPP scoops a 0% rate – no paperwork required.

What are the withholding tax hikes proposed under Section 899?

Section 899 goes from bad to worse depending on which version of the legislation we’re talking about.

Currently, one version has been passed by the US House of Representatives and another is due to be voted on by the Senate.

It’s worth saying that the entire bill is still subject to amendment as it journeys through Congress. Section 899 is not yet set in stone.

But here’s where we’re at:

Section 899 WHTHouse versionSenate version
WHT rate after phase-in50%15% to 45% depending on existing treaty rates
Phased rise5% per year5% per year
DTA discount effectAll rates rise 5% per year until the 50% cap is reached.DTAs cushion the blow e.g. Existing 0% rate rises to max 15%. 30% rate rises to max 45%.

A quick example may help you better understand these proposals.

Let’s say you (or your fund) currently pays a 15% WHT rate on US dividends. In this case the House plan will demand 50% of your income in year seven after Section 899 is invoked.

That’s the ceiling rate. You’ll pay 50% from there on in (as will everyone else once the 5% per year phased hikes have done their work.)

The Senate version still screws you, but it’s gentler, possibly more classy. The lovely senators jack the rate three times and respect your DTAs.

F’r instance, a 15% payer caps out at 30% after three years.

It’s still less than ideal.

How bad?

You can estimate your loss of return by multiplying your investment’s dividend yield by your WHT percentage.

The S&P 500’s dividend yield is 1.3% according to the current S&P Dow Jones factsheet. So your loss to withholding tax is approximately:

WHT rate0%15%30%45%50%
Loss of return0%-0.2%-0.39%-0.59-0.65%

Thus if you pay 15% WHT now, your dividend return is reduced from around 1.3% to 1.1%

The House’s 50% revenge rate would cut your dividends in half. You’d be losing 0.65% based on the current yield.

That will add up over time.

Moreover, the S&P 500’s yield is near its historic low. An average yield of 1.5% to 2% is more typical.

The effect is worse still if you’re invested in higher-yielding stocks, such as a US dividend growth strategy.

Run away?

It’s important we don’t lose our heads.

Nobody wants to lose halve their dividend return, but here’s what it would have looked like (red line) compared to the returns you actually made investing in the S&P 500 this past decade while paying 15% WHT (blue line).

Nominal USD annual total return data from Aswath Damodaran. Fund costs not included. June 2025.

In the worst-case 50% WHT scenario you’d have booked a 12.1% annualised return instead of a 12.7% annualised return over ten years.4

As I say: not great. It does hurt!

But you would still have been better off investing in US equities versus the World ex-US over this period, even if ultimately exposed to the hardcore version of Section 899.

Tax tail meet investment dog

Of course we can argue that the S&P 500 would have been less attractive to global investors, or that US holdings will henceforth come with greater political risk attached…

I’d sign up to all of that.

But pre-emptively moving now to down-weight the US in our portfolios solely on the basis of Section 899 looks premature to me.

For a start the US is likely to remain one of the most dynamic markets in the world and trying to guess what will happen next is a fools’ errand. Perhaps now more than ever.

Secondly, there’s a great way to get around Section 899 – SHOULD IT HAPPEN. (Sorry about the all-caps, just channelling my inner Trump there.)

The work around

There are #reasons to think you won’t have to face the revenge tax even if the bill passes.

Synthetic ETFs don’t have to pay US WHT. They duck the tax by using a financial derivative to pay the index return – as opposed to the normie approach of actually holding the shares that comprise the index.

This isn’t regarded as a tax dodge.

Synthetic S&P 500 ETFs have been operating since 2010. They’ve accumulated billions in assets under management. They’re not in the cross-hairs of the IRS.

iShares, Xtrackers, and Amundi have all launched new synthetic S&P 500 ETFs in the last few years as word spread that their withholding tax advantage gave them the edge over physical ETFs.

World and global synthetic ETFs are available, too.

Sure, the US government could level the playing field later.

But for now this is an obvious get-out.

Are US Treasuries affected?

In a word, “No.” In three words, “No, for now.”

The Senate bill clarified that even the House formulation doesn’t intend to go after foreigners who are helping to fund the US deficit by owning US fixed income.

So we can rest easy on that.

Even if some maniac flips out and changes their mind then the obvious remedy would be to forget Treasuries and hold gilts instead.

Negotiation tool

(Ooh, I’m pleased with that one. Just when I thought I was all out of nicknames for Trump!)

Section 899 is intended as a tool for negotiation. It would cease to apply in the tax year after a country drops whatever tax displeases the US Treasury Secretary.

From that perspective, the phased 5% hikes are a useful way of turning the tax thumb screws: “Don’t make me do this.”

Of course, the UK or the EU may not cave. (Well, we probably will. But they may not.)

I’d need to consult a tax lawyer to understand what would happen if the UK quietly mothballed the offending taxes while Ireland didn’t.

Irish-domiciled ETFs are typically structured as Irish corporations and pay withholding tax at the fund level, so UK domiciled funds could gain a competitive advantage in that scenario.

There’s also a Section 899 exemption for ‘United States-owned’ foreign corporations. This applies if more than 50% of the entity’s vote or value is held by US persons.

Could that mean we’d be protected from Section 899 by funds from US firms like iShares, Vanguard, or State Street? Again, I’m not an international tax lawyer on a MAGA retainer. (Though I wish I was paid like one).

What’s more, a cavalcade of financial industry special interests and lobbyists is apparently working to water down the provisions as they stand.5

Finally, the One Big Beautiful Bill Act could fail to pass into law. That does happen in Congress. So this is far from a done deal.

Finally, finally, we could club together and send Trump a new Statue of Liberty. But with his face. Made out of gold. He’d like that. 

Take it steady,

The Accumulator

P.S. ‘Section 891’ already exists in US law to punish foreigners adjudged to impose unfair taxes on US citizens and interests. It’s never been invoked. Apparently Section 899 is thought more likely to be implemented (if it becomes law) because it’s not as harsh.

P.P.S. Other Section 899 provisions could adversely impact the profits of non-US companies. But that doesn’t seem worth getting into yet given all the uncertainties. Also, the damage estimates seem small, and companies could legally shape-shift their ownership structure to avoid the incoming.

  1. Lots of other countries levy similar withholding taxes but we’re not concerned with that here. []
  2. Remember it’s the fund that pays. While you don’t incur withholding tax on dividends paid directly to you by Irish-based funds and ETFs, that’s because they’ve already settled accounts with Uncle Sam before you get a sniff. []
  3. Contact the fund manager or look in the annual report. Find the section that details the amount of overseas dividends received and tax paid. Divide the tax paid by the dividend amount. Multiply by 100 to discover the effective withholding tax rate. Note, this will only give you the effective US withholding tax rate if the fund invests 100% in US assets. []
  4. Nominal USD returns. []
  5. Hard to believe I’m cheering on this crew. []
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Profiting from the UK stock market liquidation [Members]

Monevator Moguls membership logo

Like a polar bear marooned on a melting ice floe, investors in firms listed on the London Stock Exchange continue to see their market shrink.

The climate has been unfavourable for a decade. Now the LSE needs urgent conservation measures.

This article can be read by selected Monevator members. Please see our membership plans and consider joining! Already a member? Sign in here.
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Weekend Reading logo

What caught my eye this week.

With AI chatbots and search overviews now vigorously putting the boot into an online media that was already on its knees, quality independent websites covering investing and money are shrinking faster than violets at an OnlyFans convention.

Good news then that the curation site Snippet Finance has started maintaining a content hub for investors, with links to all kinds of resources.

You’ll find a few Weekend Reading favourites in its listings. But there’s plenty of other lesser-seen websites, tools, and other useful stuff to explore, especially if you’re a professional or dedicated amateur finance nerd.

Be sure to check out Snippet Finance itself. Creator Yuri is the Hemmingway of investment editorial. This introduction is twice as long as a typical Snippet post.

Incidentally, I just dived into the Monevator vaults to find a similar listing I ran early in the life of this website. Of the blogs I tracked, only us, Mr Money Mustache, Financial Samurai, and Simple Living in Somerset (renamed) are still standing.

Who would want to write for us?

Talking of the bonfire of the blogosphere, any investing maniac starting today who wants to talk about their favourite subject online – doubtless having been banned from doing so by exhausted family and friends – would probably have to gurn into an iPhone to create videos for YouTube or TikTok.

Maybe that’s you – but then again maybe you’re more a great one for a witty adverb, rather than the next Mr Beast?

If so then Monevator would benefit from a new and brilliant regular writer.

We’ve had several over the years, but somehow they never last.

Often they discover they haven’t got as much to say about FIRE, personal finance, or index funds as they thought they did after the third article.

Most just can’t write the Monevator way. (It’s not so hard. Take the day off and yet still be at it at midnight. Never use two words when three will do. Add some obscure references to 1980s music and 1990s video games and you’re all set!)

Honestly it probably won’t work out with you either.

But I’d still love to hear from you if you’ve got a lot to share.

Ideally you’ll be more towards the start of your journey than we are. Not phobic about smartphones and investing apps. Maybe you even bought an NFT of a cartoon gorilla during the 2021 crypto mania before repenting your foolish ways.

But mainly you’ll be on-message with sensible investing. A bit of personal finance hackery – stoozing, credit card rewards, current account bonus chasing – wouldn’t hurt either. (It all adds up in your 20s.)

We’d want a bit of personality in the mix. Judicious. Tasteful. Nothing too influencer-y.

Can you point me to a bit of writing you did earlier? Brilliant.

Get in touch via the Contact form if you’re the person all your friends go to about investing. Just so long as you write better than ChatGPT, and without it too.

Try to enjoy the heatwave if you’re in the UK. It’ll be winter by August.

[continue reading…]

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Do the quality, momentum, low vol, and dividend growth strategies beat the market? post image

Few investors would say “no” to beating the market. Even the most passive among us would happily filter-feed a few extra quid – like a financial blue whale – if we didn’t need an ‘edge’ to make it happen.

Last week we looked at one way to potentially do that. The small value strategy has earned a 2% annualised premium versus the market over the long-term. Outside the US, small value has beaten the market by 1.5% annualised since 1990. Which is just as well, because it’s had a torrid time against the S&P 500 these past 20 years.

But other systematic market-beating strategies are available!

The cast of credible candidates includes:

  • Momentum – You buy recent winners, sell recent losers
  • Quality – Firms with high return on equity, low debt, and stable earnings growth
  • Low volatility – Low beta stocks that don’t fizz or fizzle as violently as the market. The draw here is the potential for superior risk-adjusted returns

We can invest in any of these strategies using an ETF, they’re backed by independent research, and the risks are pretty well understood.

But how well do they actually work? If in fact they do…

Are there any diversification benefits to be had if you combine the strategies?

Let’s turn to the data!

While we’re at it, let’s look at the dividend growth / leader / aristocrats strategy, too. Dividend growth is not widely considered to be a market-beating wheeze but we have the numbers, so let’s see.

Investing returns sidebar – All returns quoted are nominal total returns. US data is from the astounding Simba’s backtesting spreadsheet and compiled by members of the Bogleheads to further public knowledge of investing. World data is quoted in GBP and is from the spiffing justETF.

Market beat-’em-up

Which strategies socked it to the market over the longest comparable timeframe?

Here’s our contenders’ annualised returns versus the S&P 500 for the 40 years from 1985-2024:

Strategy Annualised return (%) Sharpe ratio
Broad market (US) 11.7 0.69
Momentum 13.7 0.71
Quality 12.9 0.72
Dividend growth 12.4 0.88
Low volatility 11.1 0.84
Small value 11.1 0.63
Small cap 10.5 0.58

US stocks only. USD returns. Small value and small cap included for comparison purposes.
The Sharpe ratio is a measure of risk-adjusted returns. Higher is better.

On these numbers momentum looks like a must-have.

That’s not too surprising. The long-short version of the momentum strategy stands out as the most profitable of the so-called risk factors in academic literature. And here we can see that a long-only iteration has delivered a 2% premium in the all-important US market.

Moreover, my numbers (not tabulated) show momentum’s volatility is pretty normal for an equity holding. Volatility averages 19.3% across the period.

Also-rans worth running

What about our other belligerents?

Quality also looks good. It beat the market by 1.2% per year on average. That will add up. Again there’s no sign you must endure sickening volatility to snaffle the extras.

The biggest surprise to me is dividend growth. High dividend stocks are routinely found by academics to lack any special sauce. But the strategy has topped the market by a commendable 0.7% over the period we have data for.

Dividend growth also delivered the best risk-adjusted returns. That is, you got more bang for your buck per unit of risk taken (as measured by volatility).

Low volatility1 didn’t beat the market but it isn’t meant to. A low volatility strategy touts superior risk-adjusted returns versus the broad market – and on that score, it delivered.

You might think of low vol as the antacid of equity strategies. It offers relief against stomach-lurching drawdowns without sacrificing too much return.

Finally, small value and small cap were poor over this time horizon. But if that encourages you to write-off small value then I’d urge you to read our recent musings on small caps first.

Time trial

Let’s split apart the 40-year timeframe. Doing so may reveal extra nuance:

Strategy 5yr ann return (%) 10yr ann return (%) 15yr ann return (%) 20yr ann return (%) 25yr ann return (%) 30yr ann return (%)
Broad market 14.5 13.1 13.8 10.3 7.7 10.9
Momentum 11.8 13.2 14.5 11.1 8.6 13.2
Quality 13.6 12.9 13.8 10.8 8 12
Divi growth 11.5 11.4 12.3 9.7 9.6 11.1
Low volatility 8.1 10.2 12.1 9.5 11.1 10.1
Small value 9.9 8.9 11.2 8.5 9.8 10.7
Small cap 9.3 9.1 11.6 9.1 8.7 10.2

Firstly, we can see that none of this lot laid a glove on the S&P 500 these past five years.

Don’t bother with risk factors unless you’re prepared for the long haul. If they beat the market all the time, then they would stop being risk factors. The key word is risk.

With that said I’ve highlighted momentum because it’s the only factor that’s consistently beaten the US market across every timeframe beyond five years.

Quality has been more erratic – while you have to push your view back at least 25 years before dividend growth bests the S&P 500.

Timely reminders

The table shows how considering different time frames can influence our view. For example, low vol and small value would look pretty hot right now, if all we had to go on was 25 years worth of returns.

Is there anything special about this quarter-of-a-century mark?

Well, the broad market nose-dived 38% during the Dotcom Bust (2000-02). But low vol, small value, and dividend growth all climbed during the crash. They hedged your losses at just the right time.

Low volatility and dividend growth also suffered far less than the S&P 500 during the Global Financial Crisis and 2022’s inflationary surge. Meanwhile, small value enjoys a lower correlation with the market than the other strategies across the entire period.

So there is some strategic value in thinking beyond the raw returns, especially if your objective is to limit drawdowns.

For example:

  • Want to curtail your losses in a crisis? Consider low volatility and dividend growth.
  • Want to diversify your returns away from big tech? Think small value.

Incidentally, I find the risk factor framework more convincing than geography as a basis for diversification. Perhaps that’s one we can debate in the comments?

Diversification potential

A correlation matrix can help us assess the diversification benefits of each asset pair. The lower the number the better.

Strategy Broad market Small value Momentum Quality Low volatility Divi growth
Broad market 1.0 0.71 0.90 0.96 0.94 0.87
Small value 0.71 1 0.5 0.59 0.71 0.78
Momentum 0.90 0.5 1 0.91 0.86 0.75
Quality 0.96 0.59 0.91 1 0.90 0.85
Low volatility 0.94 0.71 0.86 0.90 1 0.92
Divi growth 0.87 0.78 0.75 0.85 0.92 1

Small value demonstrates the most diversification potential across the board. It’s the only strategy that’s not highly correlated with the broad market.

Even more intriguing is small value’s relatively low correlation with momentum and quality. That indicates these are likely complementary assets if you’re interested in a diversified multi-factor strategy.

Dividend growth also has some diversification value, so I’d also like to test how well it performs when paired with other strategies…

Multi-factor mash-up

Let’s dial up the fortunes of three equity portfolios:

  • 50/50 momentum/small value (SCV) – best performer + most diversified
  • 50/50 momentum/dividend growth – two strong performers + moderate diversification
  • 50/50 dividend growth/small value – just to see!

Here’s the returns for each portfolio ranged against the market and their component strategies:

Portfolio 10yr ann return (%) 15yr ann return (%) 20yr ann return (%) 25yr ann return (%) 30yr ann return (%) 40yr ann return (%)
50/50 Mom / SCV 11.2 13.1 10 9.5 12.3 12.7
50/50 Mom / Divi 12.4 13.5 10.5 9.3 12.4 13.2
50/50 Divi / SCV 10.1 11.8 9.2 9.8 11 11.9
Broad market 13.1 13.8 10.3 7.7 10.9 11.7
Momentum 13.2 14.5 11.1 8.6 13.2 13.7
Small value 8.9 11.2 8.5 9.8 10.7 11.1
Divi growth 11.4 12.3 9.7 9.6 11.1 12.4

The portfolios are rebalanced annually.

What I’m looking for from my backtest portfolios is only a modest reduction in long-term 40-year returns2 versus the strongest component in the mix.

I’d also like to see strong positive diversification potential at the 25-year mark. That’s the best period for getting a quick bead on the benefit of holding an otherwise weaker seeming asset.

I also want to check if holding two imperfectly correlated assets (for example momentum and small value) essentially delivers the market return. That is, do they just neutralise each other?

Not bad

The good news is that momentum and small value do not cancel each other out.

You still earn a 1% premium versus the market over the long-term, despite SCV’s poor showing overall.

The portfolio result also significantly improves on the performance of the market and momentum over 25 years – the period most affected by the background radiation of the Dotcom Bust.

Yes, you can rightly point out that small value has proved to be a drag overall. But you couldn’t have known that in advance.

Moreover, international3 small value has beaten the international market – even over the past five years. And it’s lagged international momentum by only 0.5% annualised over those last five years, too.

In other words we can’t conclude small value is dead (although it’s clearly resting in the US).

Dividend growth also proves out its diversification chops, while otherwise the numbers show what we already know – the strategy delivered strong returns over 40 years.

Beyond that, I don’t think there’s any point me torturing the data to find some mythical sweet spot involving, say, 17.37% of quality and eye of newt and whatnot.

Essentially, I just wanted to check that choosing moderately correlated factors can produce a diversification uptick without banjaxing the return premium.

If you don’t want to invest in something that hasn’t outperformed for the last ten years then fair enough. Stick to the market, I think that’s a perfectly rational place to be.

Show me the world

We can gain an alternative perspective by checking live fund data. A raft of World risk factor ETFs launched in Europe in 2015, so we can just about scrape up ten years worth of GBP returns by comparing them:

Asset class 5yr ann return (%) 10yr ann return (%) Sharpe ratio
Broad market 12.4 12.6 0.79
Momentum 12.5 14.8 0.82
Quality 11.7 12.9 0.79
Multi-factor 11.6 11 0.69
Low volatility 6.9 9.9 0.76
Small cap 9 9.5 0.56
Small value 12.9 7.8
Dividend growth 8.3 7.2 0.48

Nominal total returns. ETF returns courtesy of justETF. 10-year return is actually 9-years and 9-months due to the youngest ETF’s inception date. Small value is DFA’s Global Targeted Value fund courtesy of Morningstar. Sharpe ratio is based on 10-year returns (not available for small value).

On this view, small value is the best performer over five years but the second worst over ten.

Momentum is the only strategy to beat the market convincingly over ten years.

Dividend growth had a particularly tough time of it.

What does this tell us?

  • It’s been a great time to be a momentum investor
  • Don’t believe small value is dead
  • Don’t count on any strategy beating the market while you happen to hold it
  • Don’t rely exclusively on return comparisons or the experience of a single market to form a view

Personally, before I commit a penny I want to read independent research that can offer:

  • Some confidence the strategy will work in the future
  • A guide to the risks
  • A reason to believe this is more than just an eye-catching pattern in the data or a conveniently arranged backtest

Take it steady,

The Accumulator

  1. Also minimum volatility. []
  2. The maximum comparable timeframe. []
  3. International means ex-US in this context. []
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