Right now, I still hold Vanguard Emerging Markets Stock ETF (VWO) and pay the dividend withholding tax every year. I wonder if it would be better to sell VWO to cut the future dividend withholding tax. Before I continue, here’s some background:
- In a portfolio asset allocation update in 2007, I decided to use Lyxor ETF Asia Pacific Ex Japan listed at SGX (symbol: AEJ) to replace VWO for future purchase. But I still keep my VWO holding.
- As a result, I am still paying every year 30% dividend withholding tax on the dividend I receive from VWO.
- The dividend withholding tax is about USD10-15 every year.
- In my previous post on claiming back US dividend withholding tax on non-US equity ETF, I decided not to pursue that avenue to claim back dividend withholding tax for VWO, because my broker’s Form 1042-S does not list the necessary information and the dividend tax amount is small to worth the effort.
To get an idea of how much dividend withholding tax I would be paying if I were to hold it for the next 30 years, I calculated the cumulative present values of the tax in this spreadsheet Present value of VWO dividend tax (Google Docs) with a discount rate of 2.5%. The rate 2.5% is the interest rate of CPF Ordinary Account.
As you can see, the cumulative present values of the tax paid for the next 30 years are between USD200-300. Compare this with the broker commission of USD15 if I sell VWO, it seems logical to me to sell VWO to save on the tax. The sales proceed would be used to buy VWO’s replacement – Lyxor ETF Asia Pacific Ex Japan.
Does this make sense to you? Is the maths correct? Let me know and leave your comment, please.
2 responses so far ↓
Wilfred Ling // Tuesday, 26 May 2009, 11:39 pm at 11:39 pm |
choozm,
You overlook something – the Lyxor ETF Asia Pacific Ex Japan ETF is not a pure fund-based ETF. It can invests up to 10% of its NAV in swap. The counterparty is currently itself (SG). Am not sure whether you want to have 10% of the fund subjected to a counterparty default risk. Although it is 10% at risk, but in the event the counterparty defaults, the ETF Trustee will have to renegotiate with a new swap counterparty. Since swap is OTC, the negotiation can take sometime.
What’s wrong with IEEM at London? No dividend withholding tax and pure fund-based (disclaimer: at the present state of my knowledge!).
choozm // Thursday, 28 May 2009, 2:41 pm at 2:41 pm |
Hi Wilfred,
Thanks for your comments. I am aware of the 10% swap-based nature of Lyxor ETFs.
Given that there is no dividend tax, ETFs in London stock exchange are quite attractive. But broker commission is relatively expensive and IEEM expense ratio (0.75%) is quite high. IMO, it is still worth a look if purchase amount is large enough to justify the broker commission.