The options for Singaporeans to form a portfolio that is
- low cost or cost effective
- easy to managed long term
- fundamentally sound
- passively managed as opposed to active management
is difficult to carry out.
Unit Trusts and Exchange Traded Funds are standard ways to form that.
The problem with Unit Trust is that sales charge comes up to at least 1%, and their expense ratio at the lowest for passively managed is 0.95%, which is rather high. We are talking about the Infinity Global Stock Index Fund. You can read my write up over here.
There is a Global ETF listed on the SGX that satisfy for the above requirement. This is the MSCI WORLD Index UCITS ETF issued by Deutsche Wealth Management (Factsheet here). The expense ratio is half of the unit trust at 0.45%, there is no death or inheritance tax issue as opposed to investing in foreign exchanges. The problem with this ETF is that it is a synthetic ETF as oppose to a non-synthetic.
Synthetic means the ETF does not hold an actual basket of stocks but are holding derivative swaps. The fear is that there are counter party risks. (Read this for more explanation)
Such a shame. We almost have the perfect product.
One prospective country for us to purchase an ETF that enables you to invest in a basket of world stocks is the London Stock Exchange (LSE). There, you can purchase VWRL or Vanguard FTSE All-World UCITS ETF:
This Fund seeks to provide long-term growth of capital by tracking the performance of the FTSE All-World Index, a market-capitalisation weighted index of common stocks of large and mid cap companies in developed and emerging countries. The Fund employs a “passive management” – or indexing – investment approach, through physical acquisition of securities, designed to track the performance of the Index, a free float adjusted market capitalisation weighted index. The Fund will invest in a portfolio of equity securities that so far as possible and practicable consists of a representative sample of the component securities of the Index.
This ETF is widely diversified, low cost (0.25% expense ratio), non-synthetic, passively managed and managed by a very experience house famous for their passive index fund.
LSE makes a better place compare to NYSE (where its cousin the Vanguard Total World Stock Market ETF VT is listed) due to its more favorable death tax situation.
If you add up your costs for investing which is commission/sales charges + expense ratio the locally listed DBXT MSCI World ETF makes the most sense.
VWRL is not bad if you use Standard Chartered Online Trading to purchase since they do not have minimum and your commission is only 0.25%. The problem is that for UK, they levied a 0.5% stamp duty on all purchase transaction.
That is a bummer. Here you can see a UK Stamp duty of $0.20 for 1 share purchase which equals 0.5%.
We got some good news that UK are removing this UK Stamp Duty so as to make UK a more conducive place versus Ireland for ETF.
Stamp duty on Exchange Traded Funds (ETFs) is to be abolished from April 2014 in a bid to encourage more firms to domicile products in the UK.
The move is an attempt to bring the UK into line with other playing fields: though London is Europe’s biggest market for ETF trading, the vast majority of ETFs are domiciled offshore in order to avoid investors incurring the stamp duty.
I even wrote in to LSE to verified this. They say this is true but that this falls under the jurisdiction of the UK tax department more than them.
So why is SCB still making us pay this stamp duty?
Apparently, according to the SCB personnel who helped me checked, this removal of stamp duty is only applicable to UK domiciled folks and not to others (that includes you and me most likely).
Update 28th April 2014: According to reader MoMo who called in and check, there seem to be some good news. It would seem that ETFs on LSE with ISIN starting with GB and IE are exempted from stamp duty.
The fees shown when placing order is only indicative. To look at the actual cost, you have to look at the contract note.
The two Vanguard All World ETF, one in GBP (VWRL) and USD (VWRD) are listed here as having ISIN code: IE00B3RBWM25 and IE00B3RBWM25 respectively. Which qualifies them to be exempted. I will have to test it out with a transaction myself.
This is rather anal and it seems that SCB doesn’t have much choices there. We as passive investors are running out of options.
When it comes to so many hurdles (inheritance tax, low cost fundamentally sound non synthetic diversified fund) it looks like it is forcing us to form a portfolio with Infinity Global and the STI ETF.
The regulatory hurdles just makes overseas investing a big turn off to recommend to your less savvy friends.
You have a few options
- Stick with higher cost but easy to manage: Infinity Global + STI ETF
- Take the risk with counterparty risk: DBXT MSCI WORLD + STI ETF
- Jump through more hoops: Venture to Canadian stock exchange (they don’t have death taxes) to form a portfolio (unfortunately they don’t have a all in one ETF) + STI ETF
- Take the risk that US$60k and above you will be taxed 50%: VT (NYSE) + STI ETF(SGX)
- Take the risk that GBP 325k (SG$700k) and above you will be taxed 40%, 0.5% more cost: VWRL (LSE) + STI ETF(SGX)