Disclaimer: All details in this post are accurate as of 14/5/21 and are not updated with the latest information. Check out the updated post here.
Recently, I wrote an article crowning CSPX as the best S&P 500 ETF to invest in for Singaporeans. (P.S. This article is referenced heavily in this post, so it’ll probably be a good idea to check it out if you haven’t already!)
This was mainly due to CSPX being an accumulating ETF and the tax advantages it enjoys as an Ireland-domiciled ETF.
However, despite being the best S&P 500 ETF, I’m personally not invested in CSPX – or any other Ireland-domiciled ETFs – yet.
Brokers Matter Too
In the article, the only factors that were evaluated were those related to the ETFs themselves.
Another aspect of investing that also plays a huge part in your investment returns is your broker.
The fees charged by your broker add up as investment costs and if you don’t pay attention to them, your returns can be thoroughly eroded.
This means that instead of looking to select only the best ETFs to invest in or the best broker to use, what really matters is the combination of both.
If you have the best investment vehicles but a ridiculously expensive broker, your returns may turn out to be just average, and vice versa.
LSE Is Expensive
Since CSPX is listed on the London Stock Exchange (LSE), in order to invest in it, you will need to use a broker that has access to UK markets.
In general, investing in UK markets is expensive because of the fees charged by the available brokers in Singapore.
The 3 cheapest brokers for this are Interactive Brokers (IBKR), Standard Chartered Online (SCO), and Saxo.
Assuming that investments are made every month into CSPX, here are the fees you can expect to incur.
min 2 USD
|10 USD / month,
waived with AUM
> 100k USD*
|N/A||0.12% / year|
*: 10 USD/month is inclusive of all fees incurred during the month, ie if incurred 3.70 USD from fees, the monthly fee will be reduced to 10 – 3.70 = 6.30 USD, for a total of 10 USD/month
You may have noticed that IBKR’s commission fees are actually extremely low. But the caveat here is the monthly fee of 10 USD for accounts with <100k USD (~135k SGD) in assets.
As a fresh grad, it’s going to take me a considerable amount of time before I’ll be able to amass a portfolio of that size.
Until that happens, it’s going to cost me 120 USD/year in fees for using IBKR – which is a large sum to be paying especially when my portfolio size is small.
Next, SCO charges a high minimum commission fee that is only waived if you have a portfolio size of $200k or more.
This is going to take me even longer to achieve, and until then, I’ll have to pay the high commission fees every month.
The final option, Saxo, also charges a high commission fee and makes things worse with an annual custodian fee.
I left Saxo for good earlier this year. If you’re interested, you can read about it here.
Despite the high fees involved in investing in the LSE, it is still desirable to do so because when you eventually accumulate a large portfolio, Ireland-domiciled ETFs will save you a lot of money as compared to US-domiciled ETFs.
Here are 2 strategies you can adopt to go about investing in CSPX or other Ireland-domiciled ETFs.
1: Quarterly, Not Monthly
Earlier, it was assumed that investments were made every month – so commission fees were incurred every month.
And if that works out to be too high of a fee, well, a logical solution would be to reduce the commission fees by investing fewer times.
If, for example, you invest every 3 months instead of every month, your commission fees would be slashed to a third, and suddenly the fees don’t look too high anymore.
Note that this is only applicable if you choose SCO or Saxo as your broker since IBKR’s monthly fee is applicable regardless of whether you invest that month or not.
While this may be a good way to reduce your investment fees, it does have its drawbacks.
By investing every quarter instead of every month, you will have a higher cash drag – more cash sitting in your bank earning low interest instead of being invested in the market with higher potential returns.
In turn, this means that you may miss out on a significant amount of returns simply because your money spends less time in the market.
So even though you save on commission fees, you could potentially “lose” it all (if not more) by missing out on market returns.
Of course, it’s also possible that prices go down instead of up, in which case it’ll be beneficial for you because you get a larger sum of money into the market at a discount.
If you’re aware of the pros and cons of this strategy and are fine with it, by all means, go ahead with it.
But if you don’t quite fancy the idea of potentially missing out on returns, what can you do?
2: US First, Then UK
Another alternative is to invest in US-domiciled ETFs first, then switch to Ireland-domiciled ETFs.
This strategy aims to minimise investing costs throughout your investing journey.
How this works is that you start by investing in US markets first with a low-cost broker like Tiger Brokers/Moomoo.
After a few years, make the switch to Ireland-domiciled ETFs using IBKR.
The reason for this is that when you’re just starting your investing journey, your portfolio size is small and commission fees will make up the bulk of your investing costs.
Since broker fees for US markets are much lower than that of UK markets, you can save substantially on commission fees.
For example, the fees are only 1.99 USD with Tiger Brokers/Moomoo for US markets as compared to 10 GBP with SCO for UK markets.
That’s an 80% savings on fees for every trade you make.
But as your portfolio grows, investing costs such as dividend withholding taxes and ETF expense ratios will eventually outweigh commission fees.
The tax savings from Ireland-domiciled ETFs thus make them more cost-efficient as investments as compared to US-domiciled ETFs.
IBKR has the lowest commission fee for UK markets and its monthly fee will be waived earlier than SCO (100k USD vs 200k SGD), so IBKR is the broker of choice.
Furthermore, since costs will always be minimised with this approach, you don’t have to limit yourself to investing only every few months, and can instead invest monthly.
This allows you to minimise cash drag and maximise the amount of time your money spends in the market, thereby allowing you to maximise long-term returns.
My Pick: US First, Then UK
The strategy that I have chosen to adopt is #2, investing in VOO using Tiger Brokers with plans to eventually switch to CSPX using IBKR.
Personally, I think that time in the market is the best way to maximise long-term returns, so I want to invest the money that I don’t need ASAP – by investing monthly when I start drawing a salary.
This strategy allows me to do just that while also minimising investing costs along the way.
Even though VOO is less tax-efficient than CSPX, as mentioned earlier, this is not as important as commission fees at the start of my investing journey.
From my best S&P 500 ETF post, CSPX is more cost-efficient than VOO by only ~0.26%.
To put things in perspective, on a portfolio size of 10k USD, this works out to be a difference of 26 USD/year.
The fee incurred for buying VOO with Tiger is 1.99 USD.
For buying CSPX with IBKR, it is 10 USD.
Assuming I invest every month, this is a difference of 96 USD/year, which actually makes VOO cheaper than CSPX.
The turning point, theoretically, would be when the 0.26% difference between VOO and CSPX becomes > 96 USD, or at a portfolio size of about 37k USD.
At this point, the savings from CSPX over VOO becomes more substantial than the difference in commission fees, so it makes sense to switch from VOO/Tiger to CSPX/IBKR.
Of course, this is merely a theoretical value. In reality, other factors need to be considered, including:
- commission-free trades with Tiger Brokers
- FX losses with Tiger Brokers
- Changing dividend yield of VOO & CSPX (assumed to be same as VUSD)
Finding the best ETF or stock to invest in isn’t all there is to investing – finding the best broker to invest with is just as important.
I am not investing in Ireland-domiciled ETFs for now because the broker fees are high.
It is possible to reduce these fees by either reducing your investing frequency or by investing in US-domiciled ETFs first and switching to Ireland-domiciled ETFs in the future.
Since my investment philosophy is to invest my money ASAP and minimise costs, I have decided to opt for the second approach.
Which strategy do you prefer? Or do you use a different strategy? Let me know in the comments below!