Portfolio activity, October-November 2009

October is the time to do my semi-annual purchase of funds. My asset allocation plan shows that I need to top up two asset classes:

1. Europe equity
2. Japan equity

No top up for REITs as the current holdings in my portfolio is over the target allocation already, because I have accepted a number of rights issues offered by some of the REITs.

For Europe equity and Japan equity, the funds that I will use remain the same: iShares MSCI Europe ETF and Lyxor Japan (TOPIX) ETF respectively. There is an alternative to Europe equity: Lyxor MSCI Europe ETF that was listed in SGX a week ago.  The broker fee to buy this ETF is cheaper than iShares MSCI Europe ETF, which is listed in London Stock Exchange. But for now,  I will give Lyxor MSCI Europe ETF a miss because it is quite new and the asset under management is only slightly more than USD 6 million.

I have made the transaction for Lyxor Japan (TOPIX) ETF and will buy iShares MSCI Europe ETF next week, after its ex-date on 28-Oct-2009.

Sell VWO to cut future dividend withholding tax?

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:

1. 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.
2. As a result, I am still paying every year 30% dividend withholding tax on the dividend I receive from VWO.
3. The dividend withholding tax is about USD10-15 every year.
4. 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.

Claiming back US dividend withholding tax on non-US equity ETF

As I am not a US citizen, the dividend that I receive from US-listed ETF are subject to 30% withholding tax. It is OK for US equity ETF, such as Vanguard Total Stock Market ETF (VTI) that I own, because the dividend originated from US companies. However, for non-US equity ETF, such as Vanguard Emerging Markets Stock ETF (VWO), the dividend is also subject to the withholding tax. Is there a way to claim back this withheld tax on non-US equity ETF from Uncle Sam?

How to claim?

Well, a Taiwanese investor/blogger by the name of greenhorn has successfully claimed back withheld tax for non-US equity ETF dividend. He detailed the steps in Filing for Tax Refund with Form 1040NR (sorry, it is written in Mandarin). To be able to do this, you need Form 1042-S that you broker (hopefully) send you every year, and the form must show that you have overpaid the tax, as shown in the figure below (from the above article by greenhorn).

Source: greenhornfinancefootnote.blogspot.com

To be specific, in item “Income Code 06″, Gross Inome (Box 2) should only include US-sourced dividend (e.g. VTI), such that Gross Income (Box 2) times 30% should be less than U.S. Federal tax withheld (Box 7), i.e.

B*30% < C

The difference (C – B*30%) is the overpaid tax that you can claim back. This is good news to me as I can now claim back the withheld tax of my VWO.

But …

However, my 2007 Form 1042-S from optionsXpress shows that A*30% = B, as shown below.

Form 1042-S from optionsXpress

This means optionsXpress does not differentiate between US- and non-US-sourced dividend. My VWO dividend was included in the Gross Income (Box 2) and therefore, I could not claim back my withheld tax from Form 1042-S. The form does not show that I have overpaid the tax, as A*30% equals B.

This is not unique to me, as others have reported that their brokers also include both US and non-US sourced dividend as Gross Income in their Form 1042-S. In Filing for Refund of Overpaid NRA Withheld Tax with Form 1040NR, readers of the article reported that Zecco and MBTrading are two of the brokers that do this, making the Form 1042-S not suitable to claim back withheld tax. Other readers and the blogger greenhorn himself reported that Form 1042-S from eTrade and FirstTrade do differentiate between US- and non-US-sourced dividend, hence effective for claiming back withheld tax.

So, for me, I gave up this avenue to claim back withholding tax on my VWO dividends.

Dividend withholding tax of LSE-listed ETF in Saxo

After I consolidated my ETF holdings to Saxo in June, the first dividend from my ETF in London Stock Exchange was declared in my Saxo account in July. But wait, how come they were taxed at 20%? They were not taxed at all when I held the ETF in POEMS. After I have sent an email to Saxo, the withheld tax was refunded to me before the pay date in August.

Round Two

The second dividend was declared in October. Again, it was taxed at 20%! After a few emails to chase for the refund, it was credited into my Saxo account after the pay date.

Transfer Again?

The ETF pays dividend four times a year. It is going to be a pain if I need to email for tax refund for every dividend payout. And if Saxo decides not to refund withholding tax (e.g. change in custodian structure), it may be time to do another account transfer, sigh…

iShares MSCI Europe ETF trading characteristics

Last month, I wrote about iShares MSCI Europe ETF in LSE (ticker: IMEU) as the replacement for iShares DJ STOXX 50 ETF (EUN) in my portfolio. However, the volume and spread information of IMEU was unknown to me at that time. Following that, I have recorded the price, volume and NAV of IMEU over 19 days from September to October. 

The results are in this online spreadsheet, which contains two sheets: (1) Volume and Spread; (2) Premium/Discount Chart. Click the tab at the top of the spreadsheet to view them. Below are the summary over the observed period.

Bid/ask spread

• GBP 0.034 or 0.25% most of the time

Average volume

• about 22,511 shares

Premium/discount

• # of Days between -0.25% & +0.25% = 2
• % of Days between -0.25% & +0.25% = 11%

• # of Days between -0.5% & +0.5% = 4
• % of Days between -0.5% & +0.5% = 21%

Buy/Sell Volume

• Buy volume: 10,302 ~ 15,302 shares
• Sell volume: 10,302 ~ 15,302 shares

From the above trading characteristics, this ETF has narrow bid/ask spread. Most of the time it is traded at premium, with only 11% of days traded between -0.25% & +0.25%. The period also coincided with the financial crisis and market turmoil, so large premium/discount and spread was observed on some days.

Throughout the period, consistent buy and sell volume was observed in the queue, as you can see in the Buy Vol and Sell Vol column in the spreadsheet. The volume times the price are more than enough to meet my investment need. For example, on the first day, there are 10,302 shares selling at GBX 1,448.91, which is equal to GBX 14,926,670.82 or GBP 149,266.70.

The fund Size has also increased from EUR 82,674,000 as of my last post to EUR 166,616,000 as of 30 Oct 2008. With the above information, I have decided to replace EUN with IMEU as the Europe equity in my portfolio.

iShares MSCI Europe ETF in LSE

iShares MSCI Europe ETF (ticker: IMEU) has been listed in the London Stock Exchange (LSE) for slightly more than one year already. It offers broader market coverage than the iShares DJ STOXX 50 ETF (ticker: EUN) I use to cover European stock market. I am considering IMEU as a replacement for EUN.

	iShares DJ STOXX 50 (EUN)	iShares MSCI Europe (IMEU)
Expense Ratio	0.35%	0.35%
Fund Size	EUR 771,590,000	EUR 82,674,000
No. of Holdings	51	394
Tracking Error (1yr)	0.23%	0.11%
Premium/Discount	?	?
Bid-Ask Spread	?	?
Buy/Sell Volume	?	?

Data taken from http://uk.ishares.com on 09 September 2008.

IMEU fund size is reasonable and tracking error is better than EUN. To examine its trading feasibility, I will need to track its premium/discount, bid-ask spread and buy/sell volume over a couple of weeks.

Consolidated my ETF holdings

Last month, as planned in my previous post, I transferred part of my ETF holdings to Saxo. My ETFs are now held in the accounts below.

• DBS Vickers Securities
  • Vanguard Total Stock Market ETF (US)
  • ABF Pan Asia Bond Index ETF (HK)
• Saxo Capital Markets Singapore
  • iShares DJ STOXX 50 ETF (UK)
  • Vanguard Total Stock Market ETF (US)
  • Vanguard Emerging Market ETF (US)

I will use Saxo for my subsequent ETF purchase. ETF in DBS Vickers Securities will remain as it is to save transfer fee.

How long did it take to complete the transfer? After I have authorized both parties (one for transfer-out, one for transfer-in), it took about ten working days. Remember to ask both parties for forms and instruction to authorize both parties to do the transfer. The transfer from optionsXpress to Saxo was delayed because I did not know I also need to inform the party who will do the transfer-out of shares.

Consolidating my ETF holdings

My ETFs are held in several broker accounts, as shown below. This is because I have changed broker several times when searching for low cost broker for ETF in US, UK and HK exchanges.

• DBS Vickers Securities (formerly DBS Vickers Online)
  • Vanguard Total Stock Market ETF (US)
  • ABF Pan Asia Bond Index ETF (HK)
• POEMS
  • iShares DJ STOXX 50 ETF (UK)
• optionsXpress
  • Vanguard Total Stock Market ETF (US)
  • Vanguard Emerging Market ETF (US)

Each broker has its disadvantage. DBS Vickers Securities is the only broker I know in Singapore that does not charge custodian fee for US stocks, but its commission is higher than others. optionsXpress, which started its business in Singapore later, charges less commission than DBSVickersOnline, but funding the account is a bit troublesome when I use bank draft from Custom House for its lower foreign exchange spread. Finally, POEMS charges custodian fee and dividend handling fee, though its UK trading commission is lower than others. So, it would be good if there is a broker that is easy to fund and with low commission to hold all my ETFs.

Recently, a friend mentioned consolidating his ETF to Saxo Capital Markets Singapore because of its low commission for UK market, zero custodian fee and zero dividend handling fee. I have explored this option before but put off the idea due to the minimum SGD15,000 requirement to open an account. Later I found out from Saxo customer service that I could transfer in stocks to meet the minimum SGD15,000 requirement. So I decide to consolidate my ETFs to Saxo. The advantages are:

1. Lower commission than POEMS for UK stocks.
2. Zero custodian fee and dividend handling fee as compared with POEMS.
3. Ease of funding: you can fund the account by SGD cheque. Trade done in foreign currency are converted using the current spot rate plus/minus 0.5%. This is close to Custom House rate and lower than banks.

As transferring of stocks from one broker to another incurs fee, I plan to transfer my ETFs only from optionsXpress to get rid of the funding headache, and from POEMS to get rid of the high commission, custodian fee and dividend handling fee. I will leave the ETFs in DBS Vickers Securities because they do not incur on-going custodian fee.

The transfer of my ETFs to Saxo is in progress. I will post update when they are done, so stay tuned.

Buying USD-denominated stocks in SGX

Recently I bought Lyxor Japan ETF in SGX which is denominated in USD. I use Lim&Tan broker to buy USD-denominated stocks because its minimum commission is lower at USD12.50. I would usually click the estimated commission link to check how much commission is payable before I submit my order. If I choose to settle the order in SGD, the minimum commission becomes SGD25. Given the current USD:SGD exchange rate, it is more expensive than the commission in USD. If I choose to settle the order in USD, and convert the total order value to SGD, which commission is applied?

I emailed Lim&Tan helpdesk to clarify and received their call on the same day. Below is Lim&Tan’s reply:

1. Settle the order in SGD — minimum commission SGD25.00
2. Settle the order in USD — minimum commission USD12.50
3. Settle the order in USD, then call Lim&Tan within T+2 to convert total order value to SGD — minimum commission USD12.50 converted to SGD, which is currently about SGD17.

Of course, I use the third way to buy Lyxor ETF because the commission is cheaper.

Investing in foreign ETF

A reader asked me in email how I invest in ETFs that are not listed in Singapore Exchange. I replied that currently for Vanguard Total Stock Market ETF (VTI) that is listed in the US, I use optionsXpress Singapore; for iShares DJ STOXX 50 ETF (EUN) that is listed in London Stock Exchange, I use POEMS. However, this may change as I am considering other low cost brokers to consolidate my ETF holdings. I will write on this if there is any update.

In my reply to the reader, I also included sgfunds.com topic “Seek Help in Investing in Foreign ETFs“, which has some information on foreign ETF trading, tax and charges.