If you’ve read up about ETF investing as a Singaporean, you’re probably familiar with the topic of Ireland-domiciled ETFs vs US-domiciled ETFs.
It’s broadly agreed that being invested in 1 of these ETFs is more advantageous than the other.
But this doesn’t mean that we should blindly accept it and let it dictate our investing choices.
After all, there are more things that we should consider when deciding on an investing strategy like how much it costs to invest and how often you can invest.
I’ve actually written posts about this topic in the past, but things are slightly different now that brokers are offering zero-commission trading.
Today, I’ll provide my updated analysis about whether it’s better to invest in Ireland-domiciled ETFs compared to US-domiciled ETFs.
In particular, I’ll be using the ETFs CSPX (Ireland-domiciled) and VOO (US-domiciled) to draw comparisons, both of which are S&P 500 ETFs.
In general, it’s agreed that investing in Ireland-domiciled ETFs is better than US-domiciled ETFs for Singaporean investors.
There are 2 main reasons for this.
1: Lower Dividend Withholding Tax
The dividend withholding tax rate for Ireland-domiciled ETFs is only 15% as compared to 30% for US-domiciled ETFs.
This tax applies to all dividends being paid out and depends on the country of both the payer and the payee.
In the case of ETFs, there are always 2 payer-payee pairs involved.
The first is the underlying stocks of the ETF, like Apple in the case of an S&P 500 ETF (payer) and the ETF itself (payee).
The second is the ETF (payer) and the investor (payee).
In the case of an S&P 500 ETF that pays, for example, $100 in dividends, this is the effect of withholding tax on investors.
As you can see, Ireland-domiciled ETFs are more favourable for investors when it comes to dividends.
2: Accumulating ETFs
Next, Ireland-domiciled ETFs have the possibility of being Accumulating ETFs, while US-domiciled ETFs are typically Distributing ETFs.
US-domiciled ETFs are required by law to pay out at least 90% of dividends to investors, while there is no such law in Ireland.
There isn’t a whole lot of difference between Accumulating and Distributing ETFs that track the same index.
After all, the underlying stocks and portfolio allocation should be the same.
Still, Accumulating ETFs tend to be more favoured among investors who are seeking to, well, accumulate wealth.
This is because they remove the need for investors to reinvest dividends on their own, which is convenient and reduces idle cash.
It also means that dividends are reinvested into the market more quickly as compared to reinvesting the dividends on your own, as with a Distributing ETF.
These slight differences make Accumulating ETFs slightly more efficient at building wealth than their Distributing counterparts.
You can read more about their differences in my post about Accumulating VS Distributing ETFs.
Other Things To Consider
So far, the points above only focus on the ETF aspect of investing.
But this doesn’t mean that it’s strictly better to invest in Ireland-domiciled ETFs.
This is because we need to account for the big picture and there are other things to consider when it comes to your investing strategy.
Brokerage fees, availability of fractional shares, etc. are other important factors to think about as well.
In order to decide which type of ETF makes a better investment for you, it’s imperative to weigh factors across different aspects for each type of ETF.
Brokerage fees commonly comprise commission fees, platform fees, and foreign exchange (FX) fees.
US-domiciled ETFs can be traded on US exchanges like the New York Stock Exchange (NYSE).
More often than not, commission fees for investing on US exchanges are the cheapest.
There are even several brokers in Singapore that offer zero-commission trading for US markets.
This makes brokerage fees extremely low and reduces investing costs.
Investing in the London Stock Exchange (LSE), which is the exchange in which Ireland-domiciled ETFs can be traded, is not quite as cheap.
Platform fees may or may not be charged by brokers, and FX fees may be upfront costs or implicit costs by pricing it into the exchange rate.
Usually, shares are traded in whole – meaning to say that you can only trade shares in whole numbers.
As a result, the minimum amount you need to invest in a share would be the cost of the minimum trading quantity, which is usually 1, ie the share price.
It also means that you can only invest in increments of that price since you’d be forced to buy the shares in whole units.
Fractional shares allow us to invest in a fraction of a share, which means that we don’t need to trade shares in whole numbers.
This is an advantage when share prices are high because it reduces the “barrier to entry”, which is usually the price of 1 share.
It also allows you to invest all of your cash to minimise idle cash since you’re able to trade shares in fractions.
For example, if an ETF costs $600 and you only have $500, you wouldn’t be able to invest at all.
With fractional shares, you can invest your $500 into that ETF by owning a fraction of it rather than a single unit.
Or, if you have $1000 to invest, you’d normally only be able to buy 1 share and have $400 leftover.
Fractional shares will allow you to invest your whole $1000 by owning 1.67 shares.
Generally, fractional shares are supported for US-domiciled ETFs, but not for Ireland-domiciled ETFs.
Comparison – CSPX vs VOO
To decide whether Ireland-domiciled ETFs are better than US- domiciled ETFs, I’ll do a comparison of the whole investing process for each case.
The ETFs I will use are CSPX and VOO, both of which are S&P 500 ETFs that track the same index, as they are some of the most popular ETFs.
Choosing The Brokers
First, we need to decide which broker to use when investing in CSPX and VOO respectively.
CSPX trades on the LSE and VOO trades on the NYSE.
I’ve written a post on the best broker for investing on the LSE, and that’s Interactive Brokers (IBKR) due to their low commission fees.
You can check out my guides on IBKR here.
Note: if you’re a priority banking customer with Standard Chartered, you might want to use Standard Chartered’s online trading instead as the minimum commission fee is waived
As for investing on the NYSE, I’ll look at brokers that offer zero-commission trading, since that will play a part in minimising investing costs.
Based on my previous post comparing various zero-commission brokers, the best option here is Syfe Trade.
You can check out my review on Syfe Trade here.
I’ll also consider the case of using IBKR to invest in VOO since the fees are still reasonably low and might even be cheaper than Syfe Trade with all things considered.
Before we dive into the comparison analysis, we need to make some assumptions about the investing behaviour and strategy that will be adopted.
First, I will assume that investments will be made monthly, as per a dollar-cost-averaging (DCA) strategy.
Next, I will assume that investments are made in only 1 ETF each month, which is either CSPX or VOO.
I will also assume that SGD is deposited into the brokerage account and converted to USD within the brokerage platform on the same month that the investment is being made.
Finally, I will assume that we can ignore the effect of ETF performance since both CSPX and VOO track the same index.
Let’s first take a look at the fees incurred from each brokerage platform.
Neither IBKR nor Syfe Trade charge a platform fee.
IBKR charges a minimum commission fee of 1.70 USD or 0.35 USD depending on the country of the exchange and an FX fee of 2 USD.
Syfe Trade offers 2 free trades every month and doesn’t charge any upfront FX fees but has implicit FX fees in its conversion rates.
As of writing this post, this implicit FX fee stands at ~0.37%.
In other words, the total brokerage fees incurred from IBKR and Syfe Trade are 3.70 USD/2.35USD and 0.37% of the sum invested respectively.
|IBKR (LSE)||IBKR (NYSE)||Syfe Trade|
|1.70 USD||0.35 USD||Free|
|FX Fee||2 USD||2 USD||0.37%|
|Total||3.70 USD||2.35 USD||0.37%|
Remember how I mentioned earlier that IBKR might be cheaper than Syfe Trade even after accounting for the latter’s zero-commission pricing?
That’s because of Syfe Trade’s implicit FX fee of 0.37%.
Depending on how much you are converting, it might be cheaper to pay the upfront fees on IBKR to enjoy a better conversion rate.
This is true when 0.37% of the amount you’re converting is equal to or greater than 2.35 USD – or 2.35/0.37% = 635 USD = 850 SGD.
There are 2 types of costs or fees that ETFs are subjected to.
The first is the expense ratio, which is a fee that is charged for the management and upkeep of the ETF.
This is 0.07% for CSPX and 0.03% for VOO.
Next, there is a dividend withholding tax that is imposed on the dividends that are paid out by the ETF.
As mentioned earlier in the post, this tax is 15% for CSPX and 30% for VOO.
However, this does not mean that the effective cost to investors is 15% and 30% respectively.
This tax is applied only on the dividends that are paid out, ie the dividend yield of each ETF.
For example, if VOO’s dividend yield is 1%, the effective cost of the 30% withholding tax is 0.3%.
|Withholding Tax Rate||15%||30%|
Factoring in the dividend withholding tax rate for CSPX and VOO, the effective cost of this tax is 0.27% and 0.56% respectively.
This brings the total ETF costs for CSPX and VOO to 0.34% and 0.59% respectively, based on the sum invested.
Total Investing Costs
Let’s put together the total investment costs for each scenario.
For investing in CSPX via IBKR, the total cost is 3.70 USD per trade + 0.34% per year of the total sum invested.
In order to compare the costs, we need to annualise the cost of the brokerage fees.
Since 3.70 USD is the cost per trade, and 1 trade is placed per month, the annual cost of the brokerage fee is 3.70 * 12 = 44.40 USD.
This means the annual investing cost of CSPX via IBKR is 44.40 USD + 0.34% of the total sum invested.
Following a similar approach for investing in VOO via IBKR, the annual cost of the brokerage fee is 2.35 * 12 = 28.20 USD.
This means the annual investing cost of VOO via IBKR is 28.20 USD + 0.59% of the total sum invested.
For investing in VOO via Syfe Trade, the total cost is 0.37% + 0.59% = 0.96% per year of the total sum invested.
Which Is Cheaper?
Now that we’ve totalled up the investment costs for each scenario, which is the cheaper option?
Based on the total costs, we can see that the final comparison for CSPX/IBKR VS VOO/IBKR VS VOO/Syfe Trade is 44.40 USD VS 28.20 USD + 0.25% VS 0.62%.
CSPX/IBKR VS VOO/IBKR
In this case, we can further simplify the comparison to 16.20 USD VS 0.25% for CSPX VS VOO.
This means we are comparing a fixed brokerage fee of 16.20 USD against an annual percentage-based cost of 0.25%.
Due to the way that a percentage-based cost works, it is advantageous when your total invested sum is small but disadvantageous when your total invested sum is large.
In other words, it makes sense that investing in VOO will be the more economical option initially.
But eventually, it will tip in favour of investing in CSPX when the annual cost of 0.25% outweighs the fixed brokerage fee of 16.20 USD.
We can determine this tipping point by taking 16.20/0.25% = 6,480 USD = 8,680 SGD.
This means that if you have less than 6.4k USD or 8.6k SGD invested, VOO is the cheaper option; if you have more than 6.4k USD or 8.6k SGD invested, CSPX is the cheaper option.
CSPX/IBKR VS VOO/Syfe Trade
In this case, we are comparing a fixed brokerage fee of 44.40 USD against an annual percentage-based cost of 0.62%.
Similar to the scenario above, investing in VOO via Syfe Trade will be the more economical option initially, but CSPX/IBKR will eventually become the cheaper option.
We can determine this tipping point by taking 44.40/0.62% = 7,161 USD = 9,581 SGD.
This means that if you have less than 7k USD or 9.5k SGD invested, VOO/Syfe Trade is the cheaper option; if you have more than 7k USD or 9.5k SGD invested, CSPX/IBKR is the cheaper option.
Which Is Better?
So, we’ve concluded that CSPX/IBKR is always going to be the cheaper investing strategy in the long run.
But does this mean it’s strictly better than VOO?
Don’t forget that with VOO, fractional share trading is possible – something that can’t be done with CSPX.
This helps to make it a lot easier to invest in VOO since you don’t have to worry about how much cash you have available to invest or the share price of the ETF.
On the contrary, CSPX’s relatively high share price can make it hard to invest small pockets of cash because you’ll likely end up with idle cash.
My Verdict: CSPX/IBKR
Personally, I think CSPX/IBKR is the best option.
While it’s true that fractional share trading that VOO supports is useful and allows us to invest efficiently, I think the cost savings that CSPX brings far outweighs that.
For one, the tipping point at which CSPX/IBKR becomes cheaper than VOO/IBKR and VOO/Syfe Trade is at a fairly low sum (<10k SGD).
Most of us will be able to hit this amount reasonably quickly once we start investing, so we will start enjoying the cost savings from CSPX early on in our investing journey.
Next, both VOO/IBKR and VOO/Syfe Trade incur additional percentage-based costs as compared to CSPX/IBKR.
Percentage-based costs grow in tandem with your portfolio value – so as your investment grows, so does the cost.
Meanwhile, CSPX/IBKR incurs more fixed brokerage costs, which will likely remain largely constant throughout your investment horizon.
The result is that there will be a growing divergence between the fixed brokerage cost and percentage-based costs as time passes and your investment portfolio grows in value.
Remember also that every additional dollar paid to fees is a dollar that you’re not able to compound.
This can easily add up to tens or hundreds of thousands of dollars over an investment horizon of 30 – 40 years!
I think that the allure of fractional shares simply isn’t worth losing this much money over.
Having uninvested idle cash is more of an issue when the amount you have to invest is small.
As you get older and progress in your career, your salary should be increasing as well, and hopefully, the amount you set aside for investing also increases accordingly.
This should help to mitigate the issue of having idle cash, and if any, it should only be in the range of hundreds of dollars, ie just below the share price of CSPX.
To invest in Ireland-domiciled ETFs, Interactive Brokers is a reputable and affordable broker you can use.
You can check out my guides on IBKR here.
Even with cheaper or zero commission fees for US market trading, investing in Ireland-domiciled ETFs still results in the greatest cost savings over time.
The lack of support for fractional shares for Ireland-domiciled ETFs is a small price to pay, and in the long run, should not make much of a difference to our investing journey.
Are you investing in Ireland-domiciled ETFs or US-domiciled ETFs?
Let me know in the comments below!