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.


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12 responses to “Sell VWO to cut future dividend withholding tax?

  1. 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!).

  2. 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.

  3. The management fees are different for each ETF. Lyxor’s ETF is higher than Vanguard. Has this factor been considered?

  4. Hi gg,

    Thanks for the pointer. I should re-consider this in the future. Right now, I just leave VWO as it is.

  5. Hi choozm,

    What about Dividend Reinvestment? I was recently introduced to this by a colleague, but I haven’t found out more.

    Not sure if you have considered this as well?

    • Hi kite,

      This feature depends on the broker. Some broker offers this feature; some don’t.

      Personally I prefer to receive dividend in cash, so that I can allocate them to the asset class that needs top-up.

      • Also saw your recent tweet; I am still amazed at the number of investing platforms and brokers you seem to be using.
        I *have* to live Citi which has an incredible number of issues with their platform (at least with my account) but I do not want to disperse myself with too many brokers at first.
        I plan to use only a few ETFs at first, and now that Saxo has re-lowered its minimum amount, I plane to use Saxo.

  6. (sorry for all the spelling mistakes, cannot edit comment)

  7. Hi ilcourtilcourt,

    I wish there is one platform/broker in Singapore that I could use, with low fee and access to suitable ETF. The unit trust funds transferred to POEMS are for other purpose, not for the portfolio listed in this blog. The reason is to keep them entirely in POEMS for ease of management for me (out of sight, out of mind :). The unit trust funds transferred to AvivaDirect are the global bond funds used in the portfolio in this blog and cash fund for short term future expenses.

    As for the multiple brokers, it is a long story … Due to historical reasons to save on broker fee and custodian fee, I ended up with using a few platforms/brokers. When I wanted to buy my first ETF in US in Jan 2005, there weren’t many brokers with reasonable fee, and no ETF was listed in SGX. I used DBSVickersOnline because it does not charge custodian fee. For ETF in London stocks exchange, I used POEMS for its cheaper broker fee.

    Then came Optionsxpress in Singapore with cheaper broker fee, and in 2006 I started to use it for US ETF. But UK ETF was still in POEMS, and US ETF was still in DBSVickersOnline.

    Then came Saxo. In 2008 I consolidated my ETF from optionsXpress and POEMS to Saxo and use Saxo for future ETF purchase. I leave the US ETF in DBSVickersOnline as there is no compelling reason to move it and DBSVickersOnline does not charge custodian fee. So right now, my ETFs are in Saxo (active use) and DBSVickersOnline (use it when there is broker fee discount).

    It was years long process of searching for brokers, learning and consolidating along the way. Also see my old story: Going passive two years on.

    Cheers.

  8. Initial brokerage fee is not a very important consideration for buy and hold because the one-time charge becomes negligible over a long period.

  9. i was wondering what’s your thoughts on using interactive brokers for US ETFs.. brokerage is cheap..

    • I do not have account with this broker, so I can’t comment on the features. Besides cheap brokerage fee, consider personal preference and safeguard:
      1) ease of funding the account (do you need to go to bank to buy bank draft and mail it? the cost of bank draft? some people like trouble-free transaction, some people don’t mind the trouble.)
      2) location of support (is it in US or Singapore? some people feel more comfortable with support office in Singapore)
      3) check if it insured under SIPC.

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