World ETF, not Vanguard

[JohnB]

I'm looking for a World index ETF, Europe domiciled, UK reporting, real, not synthetic, that isn't VWRL (0.25% p/a), not because I don't like Vanguard, but I want to diversify and think its a bit pricey compared with my other Vanguard and Fidelity trackers which are 0.1%. The HSBC MSCI World ETF GBP (HMWO) (0.15%) seems the obvious choice, I know it omits emerging markets, but I'm sure their influence is minimal for a global fund anyway, and it will keep costs down. Are there any other contenders?

It must be an ETF, as it will be held in a HL SIPP, and I want to keep my fees capped at £200 p/a

[mc2fool]

SWDA (USD, Accumulating) 0.2% https://www.ishares.com/uk/individual/en/products/251882/ishares-msci-world-ucits-etf-acc-fund

and for an extra 0.1% you can have

IWDG (GBP Hedged, Distributing) 0.3% https://www.ishares.com/uk/individual/en/products/287737/ishares-core-msci-world-ucits-etf-fund

[flint]

JohnB

I recently looked for an ETF such as you describe.
HMWO was my final choice, like you, not concerned about lack of EMs,
in my case, because I much prefer large / mega caps.

[mc2fool]

HMWO was my final choice, like you, not concerned about lack of EMs,
in my case, because I much prefer large / mega caps.

Uh? Some of the world's largest companies are in emerging markets. Tencent, Samsung, Taiwan Semiconductor, Alibaba, etc. If you prefer large/mega caps you should be holding a whole-world tracker to capture those.

[Lootman]

HMWO was my final choice, like you, not concerned about lack of EMs,
in my case, because I much prefer large / mega caps.

Uh? Some of the world's largest companies are in emerging markets. Tencent, Samsung, Taiwan Semiconductor, Alibaba, etc. If you prefer large/mega caps you should be holding a whole-world tracker to capture those.

This is true although some index providers include South Korea as a developed market whereas others retain it in their emerging markets index. In terms of GDP it was 11th globally last time I checked - bigger than most European markets that are considered "developed".

Where South Korea and Taiwan are included as emerging markets they typically make up about 20% of the total market cap. Samsung alone routinely is one of the ten largest market cap companies on the planet.

My own view is that if you are going to buy a global ETF with no exposure to emerging markets then you should hold an emerging markets ETF as well.

[Hariseldon58]

I would suggest that before you seek an alternative to VWRL that you check the tracking and the “other costs” as you may find these differences far outweigh any .1% P.A. difference in charges.

Vanguard are very investor friendly in their approach.

A couple of years back I looked at Canadian ETF trackers and the iShares product was the most expensive by a margin but when you looked at the actual return over several time periods it was far better than the apparently cheaper alternatives....

[JohnB]

I agree that Vanguard are good, but I want to get them below 50% of my wealth, as its too big a commitment to one firm. Am I right in thinking that the only disadvantage of being an ETF being quoted in USD is that dividends are paid with currency conversion costs, and that US tax is not withheld? It is nice to see an ACC ETF, as it saves the bother of reinvesting dividends.

I do have emerging markets already, its USA I'm very weak on, but I'd rather gain exposure with a World fund and not worry about US withholding taxes. I suppose the 0.07% iShares Core S&P 500 UCITS ETF (Acc) is an alternative, but does its Irish domicile mean no withholding?

[hiriskpaul]

I agree that Vanguard are good, but I want to get them below 50% of my wealth, as its too big a commitment to one firm. Am I right in thinking that the only disadvantage of being an ETF being quoted in USD is that dividends are paid with currency conversion costs, and that US tax is not withheld? It is nice to see an ACC ETF, as it saves the bother of reinvesting dividends.

I do have emerging markets already, its USA I'm very weak on, but I'd rather gain exposure with a World fund and not worry about US withholding taxes. I suppose the 0.07% iShares Core S&P 500 UCITS ETF (Acc) is an alternative, but does its Irish domicile mean no withholding?

US Withholding tax is applied regardless of ETF currency, or even investment vehicle - it is withheld in UTs, ITs and for direct investment in US shares. The only way I know of avoiding it is to invest in US listed shares or ETFs within a SIPP (although investing in US listed ETFs is tricky right now).

I would endorse what Hariseldon58 has said about HSBC ETFs. I used to hold HCAN for Canadian exposure, but found that the iShares equivalent was giving better returns even though it had a higher management charge:

http://tools.morningstar.co.uk/t92wz0sj ... geId=en-GB

[hiriskpaul]

Having said what I did, there does not seem to be much in it when comparing the HSBC and iShares MSCI World ETFs!

http://tools.morningstar.co.uk/t92wz0sj ... geId=en-GB

[hiriskpaul]

p.s. The MSCI World index does not include South Korea or Taiwan. Both of those are in the MSCI EM index, so you could add with the iShares ETF EMIM.

[Lootman]

US Withholding tax is appliedregardless of ETF currency, or even investment vehicle - it is withheld in UTs, ITs and for direct investment in US shares. The only way I know of avoiding it is to invest in US listed shares or ETFs within a SIPP (although investing in US listed ETFs is tricky right now).

The other way to avoid it is to open a US sharedealing account, although that is probably somewhere between difficult and impossible for most UK residents. However for those who adopt temporary US residency, say for a job contract, then you should be able to open one and won't have to close it when you leave.

I would endorse what Hariseldon58 has said about HSBC ETFs. I used to hold HCAN for Canadian exposure, but found that the iShares equivalent was giving better returns even though it had a higher management charge:

http://tools.morningstar.co.uk/t92wz0sj ... geId=en-GB

Yes, this is true. In fact you even see iShares offering two different ETFs for the same index. For instance for emerging markets there is EEM and IEMG. The former has a higher fee but has greater liquidity - it targets institutions. The latter had a lower fee, less liquidity and targets individual investors. EEM is bigger and more popular even though it costs more.

I think there are a few reasons why iShares can get better performance and fidelity to the index even with higher fees:

1) They are just very, very good at this, having had ETFs for nearly 20 years now and index funds going back to the 1980's. In fact some of the pioneering work on index funds was done by Wells Fargo Investment Advisers in California, which was a forerunner of what is now the iShares division of Blackrock.

2) They do a good deal of stock lending which can improve returns.

3) Blackrock is so huge with so many funds that they can execute a good proportion of their trades through "internal crosses" - meaning that one Blackrock fund will be buying X whilst another is selling X, so there is no need to go out to the market.

Personally I do not see a big need to diversify between ETF providers because the big three are so huge that if one of them has a problem then probably a lot of other bad things are happening. But I would stick to the "big three": iShares, Vanguard and State Street.

[hiriskpaul]

The other way to avoid it is to open a US sharedealing account, although that is probably somewhere between difficult and impossible for most UK residents. However for those who adopt temporary US residency, say for a job contract, then you should be able to open one and won't have to close it when you leave.

True, but then you risk coming within the cross hairs of the IRS. Something I would really want to avoid!

[JohnB]

I'm confused

Hargreaves Lansdown allow me to sign a W-8BEN which removes withholding tax from US shares inside a SIPP. Would it be worth signing it for the iShares ETFS which are in USD currency and investing in US shares, but are Ireland domiciled,

There are 2 products, 'iShares Core S&P 500 UCITS ETF (Acc)', and 'iShares S&P 500 UCITS ETF (Dist)'. Do you really get more return from the Dist version because there are dividends paid that tax can be avoided on?

And does the W-8BEN do anything for the US element of a world tracker. It would seem odd that the fund could identify what fraction of the dividend was from US shares and split it out in a way the broker could adjust payments.

I do have a US pension from when I worked there for 2 years. I always assumed I could not contribute more from outside the country.

[hiriskpaul]

I'm confused

Hargreaves Lansdown allow me to sign a W-8BEN which removes withholding tax from US shares inside a SIPP. Would it be worth signing it for the iShares ETFS which are in USD currency and investing in US shares, but are Ireland domiciled,

There are 2 products, 'iShares Core S&P 500 UCITS ETF (Acc)', and 'iShares S&P 500 UCITS ETF (Dist)'. Do you really get more return from the Dist version because there are dividends paid that tax can be avoided on?

And does the W-8BEN do anything for the US element of a world tracker. It would seem odd that the fund could identify what fraction of the dividend was from US shares and split it out in a way the broker could adjust payments.

I do have a US pension from when I worked there for 2 years. I always assumed I could not contribute more from outside the country.

If only it was possible.

ETFs domiciled outside the US are subject to US withholding tax. In the case of ETFs domiciled in Ireland this is 15% due to the US/Ireland tax treaty. There is no piece of paper you can sign which will allow you to claim back the withheld tax or use it in any way, even if investing via a SIPP. Very annoying it is as well. If you invest directly in US listed shares and ETFs you can at least offset the withholding tax against UK income tax for holdings outside ISAs and SIPPs. Or not pay it at all inside an HL SIPP. I hold a few US listed ETFs in my SIPP, but HL will not alow me to buy any more. The only broker I currently use that allows me to purchase US listed ETFs is IG and that is only because they have classified me as a professional investor. Even with IG, I can only trade US listed ETFs by phone now.

On the bright side, the S&P 500 dividend yield is fairly low at about 1.8%, so you are "only" losing 0.27% per year in tax. Admittedly a lot compared with the 0.07% TER.

UK domiciled UTs and ITs are also subject to 0.15% tax due to the US/UK treaty, so no way round this by that route.

[hiriskpaul]

Ps HL will not allow any of their customers to be classified as a professional investor (I have already tried that). All their customers are retail and so subject to the advantages and disadvantages that brings.

Oh and another thing about ETFs is that, apart from FTSE 100/250 ETFs, dividends are paid in USD or EUR. HL will charge you 1% to convert each dividend payment. So there is another 0.015% gone for distributing ETFs.

[Lootman]

I do have a US pension from when I worked there for 2 years. I always assumed I could not contribute more from outside the country.

In order to contribute to a US pension plan as a non-resident alien you need to have earned income in the US for that tax year.

[JohnB]

I went for the iShares Core S&P 500 UCITS ETF (Acc). Oddly HL had even 2 variants of that: CSP1 denominated in GBP, and CSPX in USD, but the background info and ISINs were the same. iShares themselves only mentioned the latter, but I queried it with HL who confirmed there was no difference except I'd save currency conversion costs with CSP1, so I got that. I had to refresh 2-3 times to get a quote, but it worked.

[dandanman]

Thanks for this helpful thread.

Im confused about the comments on withholding tax though.

I thought I was avoided if an off shore ETF (i.e. VWRP domiciled in Ireland) had reporting status (which is does).

I dont follow the point that one has to shelter the ETF in a pension to avoid it given the above? Or have I misunderstood?

Thx.

[mc2fool]

Im confused about the comments on withholding tax though.

I thought I was avoided if an off shore ETF (i.e. VWRP domiciled in Ireland) had reporting status (which is does).

I dont follow the point that one has to shelter the ETF in a pension to avoid it given the above? Or have I misunderstood?

Yes, you have.

Reporting status (or lack of it) determines how you are taxed by HMRC on the gains from an offshore fund that isn't held in a tax shelter (ISA or SIPP). If it has reporting status then you (potentially, depending on your own personal situation of course) will be liable for capital gains tax on the capital gains, but if it doesn't have reporting status then you will be liable for income tax, at your marginal rate (20%/40%/etc), on the capital gains.

Reporting status has nothing to do with and is totally separate to withholding taxes, which are taxes withheld from the dividends of investments by the country where the investment is listed. If, for example, you buy shares in Coca Cola then the US will withhold 30% of your dividends and (unless you are a US taxpayer) there's no way to get that back from the US taxman. You can, however, reduce it to 15% by filing in a W-8BEN. All that applies irrespective of where you hold it, as the US taxman doesn't care about UK tax shelters...

...except for pensions. There is a UK/US treaty that such withholding taxes won't apply to investments held in pensions, so if you held Coca Cola is a SIPP (and your broker has done the necessary bureaucracy), then there'll be no US withholding taxes on the dividends.

However, if you buy a non-USA domiciled ETF which holds US stocks (e.g. an S&P 500 tracker) then that withholding tax will apply to the dividends the ETF receives, and hence can pass on to you, and it doesn't matter where you hold it, ISA, SIPP or unsheltered, the ETF itself suffers the withholding.

Now, USA domiciled ETFs don't suffer the withholding tax, but if you hold a USA domiciled ETF it's treated just as a single company share, like the Coca Cola case above, so outside of a tax shelter and in an ISA the dividends from the ETF will have 30%/15% withholding tax applied, and there'll be no withholding tax if you hold it in a SIPP ... however, as folks have noted, it is now all but impossible to buy a USA domiciled ETF in the UK.

[dandanman]

Thank you so much for such a speedy and clear answer! I understand now. Much appreciated.