Check out my updated post on US-domiciled ETFs VS Ireland-domiciled ETFs here.
Earlier this year, I wrote a post about why I wasn’t investing in CSPX or other Ireland-domiciled ETFs.
This was mainly due to the fact that at the time, there was no cheap way to invest in Ireland-domiciled ETFs that are listed on the London Stock Exchange (LSE).
The cheapest option was Interactive Brokers (IBKR), but they charged a monthly fee that racks up quickly.
The next best option was Standard Chartered Online, which charges a whopping 10 USD/GBP commission fee per trade.
Thankfully, the situation has changed drastically since then with IBKR’s removal of their monthly fee, which makes investing in the LSE a lot cheaper now and worth considering.
However, is this enough to warrant investors to make the switch from US-domiciled ETFs to Ireland-domiciled ETFs?
What are the costs involved in investing in Ireland-domiciled ETFs with IBKR?
Why should you even consider investing in Ireland-domiciled ETFs over US-domiciled ETFs in the first place?
All of these questions will be answered in today’s post.
Why Ireland-Domiciled ETFs?
Let’s start with the question at the source – why should investors consider Ireland-domiciled ETFs anyway?
While US- and Ireland-domiciled ETFs are almost identical in terms of performance and holdings, Ireland-domiciled ETFs provide significant advantages to non-US investors, ie Singaporeans.
1: Dividend Withholding Tax
The most notable benefit is a lower dividend withholding tax rate of 15% with Ireland-domiciled ETFs as compared to 30% with US-domiciled ETFs.
This tax is applicable on all dividends being paid out and is dependent 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 (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 favourable for investors when it comes to dividends.
2: Accumulating ETFs
Next, Ireland-domiciled ETFs provide an opportunity for investors to invest in Accumulating variants of US ETFs, which are typically only available as Distributing ETFs.
This is because US law requires ETFs to pay out at least 90% of their dividends to investors.
However, there is no such law in Ireland, so Ireland-domiciled ETFs can be either Accumulating or Distributing.
Accumulating ETFs can be advantageous for investors because it saves them the trouble of needing to reinvest dividends, which more often than not results in “idle cash”.
You can read more about this in my post about Accumulating VS Distributing ETFs.
What Are The Costs Involved?
1: Commission Fees
The first fee you need to take note of is commission fees.
For investing in the LSE with IBKR, commission fees are dependent on the currency in which the stock/ETF is denominated.
Consequently, the commission fee will be charged in the same currency.
The commission fees for the respective currencies are summarised below.
For example, since CSPX is denominated in USD, the commission fee will be 0.05% of the trade value with a minimum of 1.70 USD.
2: FX Conversion Fees
Next, unlike many other brokers, IBKR charges a fee for every FX conversion you make.
This fee is 0.002% of the trade value with a minimum of 2 USD.
However, what you get in return is a competitive, spot-rate conversion on your FX while other brokers give you an FX spread that results in ~0.3% in losses.
While a flat fee of 2 USD may seem like a huge turnoff, given that FX losses are ~0.3% from other brokers, a conversion amount of 2/0.3% = 667 USD or higher makes IBKR the superior choice.
When converting large sums of cash, this will save you much more money than the cost of the conversion fee.
You can read more details about this in my IBKR guide if you’re interested to find out more.
Should You Make The Switch?
Before making this decision, further analysis is required.
Specifically, you need to compare the costs of the investments you’re currently making against the Ireland-domiciled investments you’re thinking of making.
Let me walk you through the steps I took to decide whether or not I should switch from US-domiciled ETFs to Ireland-domiciled ETFs.
Personally, I was investing in VOO using Tiger Brokers.
As soon as I found out that IBKR removed their monthly fee, I knew that I was going to start using IBKR no matter what.
Not only does IBKR have lower commission fees for US investments than Tiger Brokers, but they also present an opportunity to invest in Ireland-domiciled ETFs at an affordable rate.
So the question then became whether I would continue investing in VOO or switch to CSPX, ie US-domiciled or Ireland-domiciled ETFs.
For a cohesive analysis, I compared both the broker-related costs and ETF-related performance of both options.
All fees in the table above are in USD.
Note that I only stated the minimum fees rather than the nominal fees because in most cases, I don’t expect the fees to be much higher than the minimum.
From this, we can see that investing in VOO is cheaper than CSPX by 1.35 USD/trade.
Assuming that investments are made once every month, this adds up to 16.2 USD/year.
|Net Dividend Yield||0.91%||1.20%|
The net dividend yield for VOO is after the effect of the 30% withholding tax.
Meanwhile, since CSPX is an Accumulating ETF and doesn’t pay out dividends, it’s not possible to determine its dividend yield.
Instead, I assumed that CSPX’s dividend yield is similar to that of VUSD – an Ireland-domiciled, S&P 500 Distributing ETF.
For Ireland-domiciled ETFs, the disclosed dividend yield is already the net dividend yield.
Further, I will also assume that VOO and CSPX will produce similar returns in the long run since they are both tracking the S&P 500.
As a result, the expense ratio and net dividend yield of both ETFs will determine which is the better ETF.
Since the expense ratio is a cost while net dividend yield represents returns, we need to compare the difference between these 2 values.
From the table above, VOO will have a net return of 0.88% while CSPX will have a net return of 1.13%.
Thus, CSPX outperforms VOO by 0.25%/year.
Putting It Together
From the broker-related costs, we know that it’s cheaper to invest in VOO than CSPX by 16.2 USD/year.
On the other hand, CSPX outperforms VOO by 0.25%/year.
So if 0.25% of your portfolio value is less than 16.2 USD, investing in VOO is better. Otherwise, CSPX is the better choice.
A simple, static calculation reveals that the point where CSPX becomes better than VOO is 16.2/0.25% = 6480 USD, or 8.7k SGD.
My Decision: CSPX
After analysing both options, it became clear to me that CSPX is the better investment decision.
At the time I was making this decision, my portfolio value had already passed the threshold value.
But even if it hadn’t, I would’ve picked CSPX anyway because it’s only a matter of time before that happens.
Since the threshold value of $8.7k is fairly low, it should be achievable in a reasonably short period of time.
Also, it’s more convenient to invest in Accumulating ETFs now when I’m young and trying to build up my wealth.
The automatic reinvestment of dividends helps to make the effect of compounding work in my favour without having to do anything.
One thing to note is that fractional shares on IBKR are only supported for US investments.
This is an advantage that you’ll have if you choose to invest in VOO over CSPX.
Fractional shares allow you to own stocks/ETFs in fractional lot sizes.
So even if you don’t have enough cash to invest in whole lot sizes, you can still invest all your cash.
For example, if an ETF costs $600 and you only have $500, you normally wouldn’t be able to invest your $500 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.
Depending on your regular investment sum and the price of what you want to invest in, fractional shares may be more beneficial to you and may make US-domiciled ETFs more favourable.
Ireland-domiciled ETFs are advantageous to us as Singaporean investors due to the lower dividend withholding tax rate.
They also provide us with a way to invest in Accumulating variants of US ETFs which are generally Distributing.
While IBKR’s removal of its monthly makes investing in Ireland-domiciled ETFs much cheaper than before, it’s still not as cheap as investing in US-domiciled ETFs.
To decide whether US- or Ireland-domiciled ETFs are better for you, you need to further analyse the effects of both the broker and ETF costs.
You can follow the same approach I used to perform this analysis and adjust it however you deem fit for your situation.
While my approach isn’t perfect, hopefully, it gives you an idea of the things you should be considering when making this decision.
Are you investing in US- or Ireland-domiciled ETFs? Why? Let me know in the comments below!