Geographical arbitrage

dilied

Can anyone please find any disadvantages of the following: as a U.K resident & citizen setting up an online brokerage account in the U.S in order to buy Vanguard ETF's such as, for example, their MSCI Emerging Markets Index tracker with a Total Expense Ratio of a mere 0.27% compared to the equivalent UK investor iShares of 0.75%? An online broker in the U.S such as etrade has v small dealing commissions and no charge for dividend reinvestments...

tradetime

Are you sure E*Trade will accept you being a UK resident, since they recently divested themselves of their UK clients to TD Waterhouse. Other than that, since the ETF's are denominated in US$ you will need to look at the price they charge to convert your currency from Sterling to Dollar to facilitate the purchase, and then back again after sale, relative to your holding period, some of these costs can be surprisingly high.

As for an arbitrage play, you'd have to be sure both funds were very much the same, such as holdings and % weightings etc.

dilied

Thanks for that; yes, E*trade U.S offers online trading accounts to foreigners (it is amazingly cheap and sophisticated compared with U.K equivalents). I would set up a $ bank account in the U.S with my bank here (HSBC), and link that account to etrade - in other words the currency exchange would be undertaken by HSBC rather than etrade. Do you happen to know whether there would be any negative withholding tax issues? Many thanks

tradetime

Afaik the US applies a withholding tax on dividends payable, I'm not sure how, or if you can reclaim this, as I tend not to hold very much in the way of dividend paying products long enough to get a dividend, and my accountant handles that stuff anyway and I've never asked her on the rare occasion that it has come up.
As far as profits from trades go, your broker should require you to fill out a W8-BEN form claiming exemption under the US/UK tax treaty