Accumulating vs dividend-paying ETF

SashaC

I've recently signed up for Interactive Brokers, and am trying to figure out a sensible default for the majority of my income. I basically want a cheap ETF that tracks the global economy, and one of the best options I've found is VT, a dividend-paying ETF for the Vanguard Total World Stock ETF, with an 'expense ratio' of 0.06%†

But as I understand it, a) if you want to reinvest dividends (automatically or otherwise), your broker is always going to charge you some fee for the transaction, and b) that's why accumulating ETFs exist.

So I've also found 'GB00BD3RZ582', an accumulating fund tracking the Vanguard FTSE Global All Cap Index Fund - but that has an 'ongoing charge'† of 0.23%.

Given that the point of an accumulating fund AIUI is to avoid reinvestment fees, is it clear which is actually the cheaper option here (ignoring the difference between the two indices which seems to be very minor)?

Some other factors:
* There's also the question of capital gains vs dividend taxes. I'm currently in Singapore, where there's basically no capital gains tax or meaningful dividend tax, though I might end up back in the UK, which has taxes for both. Current intuition is that while I'm in Singapore, the dividends would be better, since the reinvestments while I'm here won't (I think) count towards the cost basis on which I eventually sell. Except that...
* According to Gemini, 'you'll pay a 30% US withholding tax on dividends from US-domiciled ETFs because Singapore does not have a tax treaty with the US. ETFs listed on the US stock exchanges (like NYSE or NASDAQ) and those domiciled in the US will be subject to this tax on their dividend and interest income. However, the capital gains from selling the ETF shares are generally not subject to US tax for Singaporean residents, and you are not subject to Singaporean capital gains tax.' If so this seems like a strong argument for the accumulating ETF?

Thankee for advices in advance.

† Chat GPT says 'expense ratio' and 'ongoing charge' are functionally similar enough for most people not to worry about (US vs European). I trust largely trust it on a straightforwardish question like this, but not on calculations like the rest of this post

InvesterJones

Brokers don't always charge a fee for reinvesting, so that's not the sole reason accumulation funds exist.

The income fund you mention appears to be one for US investors and trades in dollars, while the Vanguard FTSE Global All Cap Index Fund is for UK and trades in GBP (not to mention is an OEIC rather than an ETF) - so there will be some currency differences as well. I can't help with other location related concerns, sorry.

Accumulating funds don't avoid dividend taxes at all, rather you have to find out from them what the amounts are because it's not obvious. 

masonic

FTSE Global All Cap is a different index that includes medium sized companies, so this is why there's a difference in cost. Acc and Inc versions of a fund will usually cost the same.

If you just want global inc. emerging markets ETF, then you could opt for Ireland domiciled ACWI @ 0.12%

Ireland domiciled ETFs only pay 15% withholding tax on US company dividends, so fund domicile matters.

If you need to understand base cost, then keep good records of excess reportable income for each year.

george4064

Another thing to be wary of is that some Global ETFs pay dividends in USD (typically the base currency of any global ETF) and then your platform may charge you a FX fee for converting that to GBP. Previously discussed/more info here: https://forums.moneysavingexpert.com/discussion/6500429/distribution-currency-from-etfs/p1 

ivormonee

Some complex stuff here regarding the tax treatment of collective investments based on their domilcile. I don't have all the answers but also keen to find out more. My initial thoughts - the withholding taxes mentioned, do they relate to tax on dividends paid by the underlying holdings of the fund, so that the fund itself receives the dividends net of tax? And is this a separate issue to the tax liability of the fund holder? Or are these somehow the same kettle of fish?

masonic

ivormonee said:

Some complex stuff here regarding the tax treatment of collective investments based on their domilcile. I don't have all the answers but also keen to find out more. My initial thoughts - the withholding taxes mentioned, do they relate to tax on dividends paid by the underlying holdings of the fund, so that the fund itself receives the dividends net of tax? And is this a separate issue to the tax liability of the fund holder? Or are these somehow the same kettle of fish?

Yes, this is tax withheld by the relevant government before dividends from companies held by the fund are transferred offshore. They can be reduced by tax treaties between the sending and receiving country. The fund holder would be liable for tax on income the fund itself is deemed to distribute, so the two are not generally matched for the purposes of a double taxation treaty. If you held a US domiciled ETF or individual shares within a pension, then in theory you can reclaim the withholding tax, but this can be challenging in practice.

It is possible to sidestep the issue by holding a synthetic fund, where the companies are not actually bought by the fund and instead the fund enters into a derivative with an investment bank to receive the return of the index. However, it is not a significant drag on performance - say the yield of the fund is 2%, withholding tax would make up 15% of the US allocation of the fund, so around 0.2% for a global index fund.

It is probably best for most investors to ignore it, beyond preferring Ireland domiciled ETFs over Luxembourg for funds with US assets.

GeoffTF

SashaC said:

I've recently signed up for Interactive Brokers, and am trying to figure out a sensible default for the majority of my income. I basically want a cheap ETF that tracks the global economy, and one of the best options I've found is VT, a dividend-paying ETF for the Vanguard Total World Stock ETF, with an 'expense ratio' of 0.06%†the rest of this post

If you are UK based, you will not be allowed to buy that fund. It is a US domiciled fund and does not have a KIID.

masonic

GeoffTF said:

SashaC said:

I've recently signed up for Interactive Brokers, and am trying to figure out a sensible default for the majority of my income. I basically want a cheap ETF that tracks the global economy, and one of the best options I've found is VT, a dividend-paying ETF for the Vanguard Total World Stock ETF, with an 'expense ratio' of 0.06%†the rest of this post

If you are UK based, you will not be allowed to buy that fund. It is a US domiciled fund and does not have a KIID.

OP is based in Singapore. I don't know what Interactive Brokers would do if they moved back to the UK. My guess is nothing if they already held it.

EdSwippet

SashaC said:

I've recently signed up for Interactive Brokers, and am trying to figure out a sensible default for the majority of my income. I basically want a cheap ETF that tracks the global economy, and one of the best options I've found is VT, a dividend-paying ETF for the Vanguard Total World Stock ETF, with an 'expense ratio' of 0.06%.

As a resident of Singapore, you want to entirely avoid VT and any US domiciled funds and ETFs. With those, you will overpay US dividend withholding tax, and may risk losing 40% of your holding above just $60k to US estate tax if the worst happens.

Non-US domiciled alternatives are VWRP (accumulating) or VWRL (distributing). At 0.22%, these have a higher TER than VT, but you will more than recover that with the much lower US dividend tax drag (0-15% of your approx 2% annual dividends, compared to the full 30% with VT), and absolutely no US estate tax entanglements.

Vanguard used to be the cost-cutting leader, but it has become complacent, and other fund providers have overtaken (or should that be undertaken?) them. For example, ACWI, all-world, not US domiciled, and comparable with VWRP, but with a TER at 0.12% close to half the cost of VWRP and VWRL.

GeoffTF

EdSwippet said:

SashaC said:

I've recently signed up for Interactive Brokers, and am trying to figure out a sensible default for the majority of my income. I basically want a cheap ETF that tracks the global economy, and one of the best options I've found is VT, a dividend-paying ETF for the Vanguard Total World Stock ETF, with an 'expense ratio' of 0.06%.

As a resident of Singapore, you want to entirely avoid VT and any US domiciled funds and ETFs. With those, you will overpay US dividend withholding tax, and may risk losing 40% of your holding above just $60k to US estate tax if the worst happens.

Non-US domiciled alternatives are VWRP (accumulating) or VWRL (distributing). At 0.22%, these have a higher TER than VT, but you will more than recover that with the much lower US dividend tax drag (0-15% of your approx 2% annual dividends, compared to the full 30% with VT), and absolutely no US estate tax entanglements.

Vanguard used to be the cost-cutting leader, but it has become complacent, and other fund providers have overtaken (or should that be undertaken?) them. For example, ACWI, all-world, not US domiciled, and comparable with VWRP, but with a TER at 0.12% close to half the cost of VWRP and VWRL.

VEVE and its accumulating version have an OCF of 0.12%. You can always add a market weight (about 10%) of VFEM or its accumulating version.

EdSwippet

GeoffTF said:

VEVE and its accumulating version have an OCF of 0.12%. You can always add a market weight (about 10%) of VFEM or its accumulating version.

Right. Which kind of underscores my aside about Vanguard no longer being the low cost leader.

A true low cost leader would have reduced the OCF of VWRL to approximate the VEVE/VFEM mix. Vanguard hasn't done that. It's not a problem if you have an ISA or a SIPP -- just switch -- but it is if you have a sizeable holding of VWRL with a large unrealised capital gain.