Here’s Why Singaporeans Should Buy UCITS ETFs

Yes, yes, buying stocks and exchange-traded funds (ETFs) and investing in US financial markets seems like a no-brainer, right? Surely, it’s the only game in town given how well US markets have done over the past 15 years. 

Well, President Trump has kind of altered that perception for long-term investors by slapping tariffs on all countries and starting a “who can blink first” trade war with China. Not exactly fun times.

But what is it that they say about investing, if you’re in your 20s, 30s, and even 40s? You’ve got a relatively long runway to invest in higher-risk/higher-reward options (i.e. good ol’ stocks). That’s because stocks have been proven to be the best long-term generator of wealth.

Yet we shouldn’t automatically think—just because the US is the world’s largest stock market—that we should build our wealth by buying into US stocks or ETFs listed on their exchanges. In fact, investing solely in US-listed ETFs could actually be counterproductive for Singaporeans looking to grow their wealth.

So here’s why Singaporeans, or anyone who’s not a US citizen, should consider buying ETFs listed outside US stock exchanges.

 

What is a UCITS ETF?

Ok, so let’s get the (legit) boring stuff out of the way first. Most investors know ETFs are a great way to get low-cost and diversified access to stock markets.

But, not everyone might be aware of the benefits of investing in ETFs listed outside of the US, especially on European stock exchanges like the London Stock Exchange (LSE).

These European-listed ETFs are referred to UCIT ETFS, short for Undertakings for Collective Investment in Transferable Securities. They  are governed by the regulatory standards of the European Union (EU), designed to protect investors and ensure transparency. I know, absolutely exhilarating stuff–I bet you can’t contain your excitement at that.

Despite the dull-sounding name, UCITS ETFs offer serious advantages for Singapore investors to build long-term wealth from stocks, bonds or any other sort of asset. Here are just a few ways in which UCITS ETFs differ from the ETFs founds in the US.

 

1. Lower dividend withholding tax

This is the biggest advantage of UCITS ETFs. If you’re a Singaporean and you receive dividends from a US-listed ETF or stock, the US government withholds 30% of that income.

So, if you’re paid US$100 in dividends for 1 quarter, you will only get US$70 of that. Raw deal, I know. 

That’s because Singapore and the US do not currently have a double taxation agreement that covers dividend income. That 30% cut is the full dividend withholding tax—and it applies across US-domiciled stocks and equity ETFs.–

Ok, so what about these so-called UCITS ETFs listed in places like London? Well, due to their structure and where they’re domiciled (Ireland, if anyone cares), the withholding tax on dividends paid is exactly half the rate of the US, so 15%!

Furthermore, broad market ETFs normally have only “Acc” (accumulating) share classes, meaning dividends are automatically reinvested—taxed at just 15%—into the ETF. This helps you compound returns faster without lifting a finger. 

Meanwhile, in the US, popular ETFs like the Vanguard S&P 500 ETF (NYSE: VOO) normally have a “Dist” (distributing) share class, meaning you get paid a dividend (as well as getting hit with that massive 30% withholding tax). But then, you’ve got to reinvest it yourself if you want to compound your wealth. It’s just another reason not to own US ETFs.

Let’s draw out a basic example. Take the Vanguard VOO ETF, which has given investors a share price return of 93.2% over the past 5 years. Sure, you’ve received some small dividends over that time, but they’ve also been taxed 30%, remember. 

Now, compare that to the London-listed iShares Core S&P 500 UCITS ETF (LSE: CSPX), which has returned 108.2% over the same periods–that’s the (preferably-taxed) dividends compounding your wealth.

 

2. Tax-free income from bond ETFs    

Bond ETFs domiciled under UCITS are treated even more favourably. If you hold a UCITS bond ETF, your coupon income is tax-free—yes, 0% withholding tax.

That’s a huge advantage over US-listed bond ETFs, which are still subject to the 30% dividend withholding tax for Singapore investors.

 

3. Estate tax exposure

Here’s another less-talked-about risk:  the US Estate Tax. It sounds ominous, and it is, especially for those of us who are non-US citizens.

That’s because (technically) the US imposes an estate tax on US assets, including stocks and ETFs. If you hold a whole load of US ETFs and pass on before selling these assets, the US government can tax your assets–for any amount above US$60,000–at up to 40%! 

No joke. Of course, we don’t want to take the risk of that, yet I’m happy to hold some US-listed stocks in my portfolio. Having said that, I believe that for the majority of our wealth (I’d say at least over 60%), we should be aiming to invest in low-cost, broad-based ETFs listed in Europe.

I mean, do we really want to take the risk of getting taxed on our assets? Especially with a US government as unpredictable as the current one, the future fiscal issues of the US could push their tax authorities to start making a concerted effort to hunt down more foreign assets to tax (like ours!)

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ALSO READ: How Can Singaporeans Get Investment Exposure to India?

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What’s next? Start reassessing your portfolio

Given the tax drag and estate planning risks of US-listed ETFs, it’s a good time to start thinking about how to build a responsible investment portfolio over the longer term.

One of the best ways to do that is to look beyond the US exchange because we can still very much get access to US stocks through UCITS ETFs. Admittedly, doing that might seemingly prohibit us from buying US stocks (GameStop to the moooooooon!) but, that doesn’t mean we can’t have some US stock holdings if we want to.

It’s more about having all the facts in front of us and making an informed decision on what’s best for our portfolio, but also our risk appetite. At the end of the day, that’s what will lead us to make better financial decisions that are suitable for our long-term future.

 

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About the author

Tim Phillips has spent over 15 years in the finance industry as an investment communications specialist with the likes of Schroders, The Motley Fool, and CGS International. He’s passionate about helping people take control of their finances by building wealth through long-term investing and thinking more coherently on all things “money”. He loves breaking down complex financial topics into content that’s informative and, most importantly, engaging.