In my previous article (you can read it here), I have invested in VT (Vanguard Total World Stock ETF). VT pays a dividend which is subjected to the 30% withholding tax. There is a bigger concern which is the estate tax levied on US-domiciled equities when you expired.
Why invest in Ireland’s domiciled ETFs?
Ireland domiciled ETFs benefit from the US/Ireland tax treaty rate of 15% on dividends instead of 30% for US non-residents. Ireland domiciled ETFs insulate investors from US estate taxes of up to 40% of the balance of US situated assets above US$60,000. Non-residents of Ireland are not subjected to Irish inheritance tax.
Accumulating funds that reinvest dividends helps investors to reduce taxes. In the US, a fund must distribute dividends to investors. In the EU, the ETF can distribute the dividends, or reinvest back into the ETF to buy more stocks. The country of the fund will withhold dividend taxes, you may pay dividend tax in your home country, when you reinvest your dividend, you need to pay brokerage commissions. In some European countries, they do not tax dividends if they are reinvested by the fund itself. It is useful to buy accumulating ETF shares.
VT vs VWRA
VT tracks the FTSE Global All Cap Index which encompasses large, mid and small-cap stocks from developed and emerging markets around the world. VT has total equity holdings of 9,461. VWRA (Vanguard FTSE All-World UCITS ETF, LSE) has a total of 3746 equity holdings. VWRA tracks both developed and emerging markets.
VT has an expense ratio of 0.08% whereas VWRA has an expense ratio of 0.22%. Both are denominated in USD. VT is listed in the US whereas VWRA is listed on the London Stock Exchange (LSE). VT pays dividends whereas VRWA will automatically reinvest dividends for you at no extra charges.
I like VRWA because I initially want to reinvest the dividends and now it can be reinvested automatically by the fund itself. The liquidity is the concern as VRWA has a lower trading volume compared to VT. The average trading volume of VRWA is around 40,000 whereas VT has an average trading volume of 3 million. The bid/ask spread may be wider for VRWA compared to VT.
After considering the 3 main factors, estate tax, reinvestment of dividends, and withholding tax, I believe VRWA will be a better hold for Singaporeans for long-term passive investment.
I will sell my VT shares and switch to VWRA. Keep it simple and buy VWRA on a monthly basis using a fixed amount.
Why Passive Investing is Hard?
Passive investing is really hard. Some find it hard to believe many investors lag the market if passive investing is so easy. However, in reality, passive investing is not easy. To do things the right way is very very difficult. That’s why investors lag.
To adopt passive investing, you need to be an optimist. You must believe that capitalism is great, human population growth, inflation, and goal for profit mean in the long run the world will prosper. Companies will innovate and do well in the future. You must believe that earnings will rise irregularly over time. This means stocks will rise irregularly over time.
You need to be cold-headed for decades. Passive investors would have had to sit through the big 2001 and 2008 bear markets and endure the downward volatility. Huge volatility is normal through the years. Painful, near-term losses get erased by higher upwards volatility. You cannot panic and sell. You need to resist putting your cash into safe harbors at these times.
Passive investors must believe over a long time horizon, their long-term returns will be positive. It will go down, sometimes with a big drawdown over short periods of a year or even over a few years. That’s hard in terms of mentally and emotionally.
During times when the market is up big, you must not get carried away by massive returns and not try to capture the return. You must be passive and believe that long-term, stocks will deliver superior returns at a premium compared to other asset classes. You cannot try to time the market by going in and out.
All the financial behavioral issues are very tough for investors to overcome.