Vanguard funds plc s&p 500 ucits etf usd(gbp) (vusa)

neildt

I'm looking to invest in the following fund 'VANGUARD FUNDS PLC S&P 500 UCITS ETF USD(GBP) (VUSA)', through Hargreaves Lansdown in my stocks and shares ISA.

I've looked at the fund details, and the currency is GBP so I assume don't need to worry about any currency exchange rates, even though the fund is in USD. I'd read somewhere that if the fund currency is USD I should be concerned about currency exchange rates.

I'm still very new to investing in stocks and shares, and previously I've invested in funds that offer either income or accumulation. So with this in mind, can somebody advise the main differences between this type of fund and say for example Legal & General US Index?

masonic

Dividends are paid in USD. You may be hit with forex charges and a delay in dividend payments. As it happens, dividends on the S&P500 are pretty minimal, so it isn't such a big deal.

If you want an alternative, there is iShares Core S&P 500 UCITS ETF, CSP1, which is accumulative, so dividends are automatically reinvested rather than being paid out and converted to GBP. Not advisable to hold in large quantities outside of an ISA due to the difficulty calculating capital gains, but fine in an ISA where you don't have a tax liability.

In both cases, the fund currency is USD, which is the currency the assets are valued in. The trading currency is GBP for both for VUSA and CSP1. So no forex when buying and selling, but there is currency risk in holding the underlying assets (neither fund is hedged).

Edit: In answer to your other question about how these ETFs compare with an open ended fund like L&G US Index, the main difference is ETFs are traded like shares on the stockmarket (live pricing and immediate trades), whereas open ended funds are valued and traded once a day. As you are at Hargreaves Lansdown, it might also be useful to note there is a cap on platform charges that applies to shares (including ETFs) that does not apply to open ended funds, and there are dealing charges that apply to trades in ETFs that do not apply to open ended funds.

neildt

Dividends are paid in USD. You may be hit with forex charges and a delay in dividend payments. As it happens, dividends on the S&P500 are pretty minimal, so it isn't such a big deal.

Apart from the possible forex charges is there anything else I should be aware of. I am looking to invest using my ISA.

grey_gym_sock

in an ISA, tax is not an issue.

the underlying investments are very similar for L&G US index and for ETFs such as VUSA or CSP1.

with HL, you pay a dealing charge to buy or sell ETFs, usually £11.95. and then you pay 0.45% per year to hold them, but capped at £45, which means you pay no more once you go over £10,000 in ETFs (and any other shares, etc) held in an ISA.

with funds, HL don't charge to buy or sell, but charge 0.45% per year with a much higher cap (it doesn't start to go down until you have £250,000 in funds).

so it depends how much you're investing, and how often you will buy (or sell), which way (fund or ETF) works out cheaper.

the L&G index fund has a choice of income or accumulation units. with the ETFs, as masonic says, you can make the same choice by picking a different ETF (VUSA for income, or CSP1 for accumulation).

hoc

Is WHT not a consideration for distributions of VUSA or similar? Dividends of US shares are reduced by 30% typically (or 15% with W8BEN as is common with SIPP, although not ISA, as Americans don't recognise ISA's special tax status). Why wouldn't VUSA dividends get similar cut? Because it is domiciled in Ireland?

Alexland

https://www2.deloitte.com/ie/en/pages/financial-services/articles/taxation-of-irish-etfs.html

Irish ETFs can benefit from the US/Ireland double tax treaty which reduces standard withholding tax rates from 30% to zero on US-source interest and 15% on US-source dividends.

Alex

londoninvestor

Useful background here:
https://monevator.com/etfs-and-the-peculiar-effects-of-withholding-tax/

Though since this was written, US ETFs have become largely unavailable to UK investors, since the ETF providers haven't produced the documentation that would allow them to continue to be market post-MIFID II.

hoc

That second link has good detail over the various scenarios and I will need to read it again more carefully when I have some time to concentrate fully. From a first pass, this is telling me that the US listed VOO would be the better choice in a SIPP as it wouldn't attract the 15% US WHT the Irish domiciled UK listed VUSA does, which even with a W8-BEN can not be reclaimed. Is that correct?

bowlhead99

hoc wrote: »

That second link has good detail over the various scenarios and I will need to read it again more carefully when I have some time to concentrate fully. From a first pass, this is telling me that the US listed VOO would be the better choice in a SIPP as it wouldn't attract the 15% US WHT the Irish domiciled UK listed VUSA does, which even with a W8-BEN can not be reclaimed. Is that correct?

Broadly, yes if you are a UK resident and investing via a SIPP which doesn't have UK tax liability on its income or gains, you are pretty safe to invest in US assets (whether directly in the US-listed companies like Microsoft, Netflix etc, or in US-resident ETFs which holds those positions in the companies). The SIPP trustee will be able to fill out a W8BENE for the SIPP, letting the US payer entity know that the SIPP qualifies for 0% withholding, so you get the US income free and clear of US tax in your SIPP, with no UK tax to pay on the income received either.

Obviously you eventually get the normal UK taxes when taking money out of the SIPP in line with UK rules, just as you would however you'd made your investment growth.

Whereas, if you interposed an extra non-US entity in between the US payer and your SIPP, which didn't qualify for 0% withholding (such as VUSA, an Irish non-pension entity) then some un-reclaimable US withholding tax would leak out when that non-US entity was paid the US income by the individual US companies or US collective scheme into which that non-US entity had invested. Leaving less income available to make its way back to your SIPP or be reinvested on your SIPP's behalf.

The extent to which there is much to be saved by investing directly into the US companies or ETFs from your SIPP can come down to how easy and cheap or costly it is to do the trades and hold the assets; and to what extent a non-US entity like VUSA might be able to avoid WHT anyway, or make money on the side from stock lending techniques etc (as alluded to on one of the links).

londoninvestor

hoc wrote: »

That second link has good detail over the various scenarios and I will need to read it again more carefully when I have some time to concentrate fully. From a first pass, this is telling me that the US listed VOO would be the better choice in a SIPP as it wouldn't attract the 15% US WHT the Irish domiciled UK listed VUSA does, which even with a W8-BEN can not be reclaimed. Is that correct?

As bowlhead99 says, broadly yes.

Another relevant area here is how it works in ISAs and unwrapped accounts. (The Monevator article suggests that foreign-listed ETFs can't be held in an ISA, but in fact they can, because they're in the category of "shares listed on a recognised stock exchange".)

Let's say I have a portfolio that is too big to fit in my ISA, I'm a basic-rate taxpayer, and I have over £2,000 in dividend income, so I'm going to pay 7.5% on my unwrapped dividends. Assume no complications with tax on child benefit etc. (The exact position depends on your circumstances and it isn't always as simple as the example I'm laying out.)

Now, if I have a US-domiciled ETF that holds only US underlying shares:

• Holding it in an ISA, I have 15% tax withheld by the US (which I can't reclaim), and of course no UK tax because it's an in ISA.
• Holding it in my unwrapped account, I still have 15% tax withheld by the US, my UK tax liability is 7.5%, but HMRC will allow me to claim 7.5% Foreign Tax Credit, offsetting the UK tax. That's because the UK and the US have a double taxation treaty, and the effect is (broadly) that you should be restored to the position you would be in if you paid only the higher of the two countries' tax, not both.

So from the perspective of sheltering dividends, I might as well not put that ETF in my unwrapped account. Because I pay the same total 15% of dividend tax either way, and if it's in my ISA, it's taking up ISA space that could be used by another investment. (It would of course be shielded from CGT in the ISA though.)

If I held an Irish ETF with exactly the same underlying US holdings, this logic wouldn't hold - I can't claim any Foreign Tax Credit because I haven't directly paid any US tax on the dividends; the fund paid that tax.

And of course this is rather moot unless/until the US ETF providers do the paperwork needed to let residents in EEA countries buy their funds again!

Pound_Coin

Alternatively you can invest with with Vanguard with lower fees