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Difficulty: Moderate
1) The Ultimate List of ETFs for SG Investors
We’ve picked what we deem to be the most suitable ETFs for SG investors, taking into account withholding tax considerations as well as other aspects. We actually have two lists – one for ETFs which give exposure to a particular region/country, and another for ETFs which give exposure to a particular sector.
2) Dividend Withholding Taxes for SG Investors
(Click here for full article on the topic) When holding foreign stocks/ETFs, withholding taxes on the stock dividends often apply. We breakdown the withholding tax considerations for SG investors when it comes to investing in ETFs, for multiple countries. Here are the main conclusions:
- For exposure to US stocks, pick an Ireland-domiciled ETF.
- For exposure to Chinese stocks, pick a Hong Kong/Ireland-domiciled ETF. DO NOT pick a US-domiciled ETF for Chinese stocks.
- For exposure to Other Country stocks, check our summary table in the full article to choose between a Local/Ireland-domiciled ETF. DO NOT pick a US-domiciled ETF.
- A US-domiciled ETF may still be appropriate in certain circumstances
3) Other Aspects to Consider When Choosing an ETF
- Explicit ETF costs: Total expense ratio
- Implicit ETF costs: Trading Liquidity, Bid-Ask Spreads, Counterparty risks
- Potential Estate Duties: The US imposes up to a 40% estate duty for *non-US residents* (including Singaporeans), for holdings of US-domiciled Stocks/ETF in excess of US$60k.
The InvestQuest’s View: Having analyzed withholding taxes as well as other factors, these are the most compelling ETFs for SG investors who desire a specific regional/sector exposure – to the best of our knowledge.
If you find this article useful, do feel free to check out our other ETF and Mutual Fund related articles too!
- SGX-listed Stock ETFs: Which are good enough for our readers?
- SGX-listed Bond ETFs: Which are good enough for our readers?
- Best ETF to buy for China Stock Exposure
- China Tech: The best ETFs and Stocks to invest in
- Ultimate List of LEVERAGED Stock ETFs
- When to use Active Mutual Funds vs Passive ETFs
- Ultimate List of Mutual Funds for SG Investors
During our research, we stumbled across several local finance sites that have done a good job explaining on the withholding tax implications for foreign stock holdings, from the perspective of a Singapore-based investor. We hope to build upon the good work that they have done.
- Investment Moats: Definitive Guide to Dividend Withholding Tax in Stock Investing
- Financial Horse: Guide to Dividend Withholding Tax for Singapore Investors
- BetterSpider: Understanding tax efficient ETFs – avoiding US withholding taxes
- New Academy of Finance: Creating The Best Tax Efficient ETF Portfolio to Invest In?
Disclaimer: We did a lot of work on this compilation and all the information is to the best of our knowledge. BUT we give no assurances on the accuracy and reliability on any of the information! We aren’t tax consultants.
1A) Selected ETFs for Regional Exposure
We previously wrote on SGX-listed ETFs and identified some of their potential shortcomings (click to see full article).
In our view, there is a strong case to explore the wider ETF universe, especially if you desire diversified exposure to a specific region and/or sector.
The shortlisted ETFs below are categorized by the geographical stock exposure they offer, which is stated on the leftmost column of the below table. We have sourced for ETFs that are denominated in the local currency of the stocks they invest in, as well as a USD-denominated alternative where possible.
Further details on each of these ETFs such as total expense ratios, average trading liquidity, bid-ask spreads and ETF replication method may be found in APPENDIX 1.
1B) Selected ETFs for Sector Exposure
The ETFs below are categorized primarily by sector exposure and specific region if applicable, which is indicated on the leftmost column of the table.
Further details on each of these ETFs such as total expense ratios, average trading liquidity, bid-ask spreads and ETF replication method may be found in APPENDIX 1.
2A) Withholding Taxes for SG Investors
For a detailed article on this topic, click here to view.
Quick Explanation of Withholding Taxes:
When holding foreign stocks/ETFs, withholding taxes on the stock dividends often apply. They are a significant consideration for SG investors. Just to be clear, this Withholding Tax applies to the dividends received, and does *not* apply to the total value of the ETF you’re buying.
When one buys stocks directly, there is one layer of withholding taxes
- From Stock to SG Investor
When one buys ETFs, there are two potential layers of withholding taxes
- From Stock to ETF
- From ETF to SG Investor
For the time being, we will just run through quick examples of how withholding taxes would apply, for a SG investor looking to buy US stocks and China stocks.
Let’s compare ways of getting US stock exposure:
- Buying US stocks directly e.g. Apple or Microsoft
- Buying US stocks via a US-domiciled ETF e.g. SPY US or VOO US
- Buying US stocks via a Ireland-domiciled ETF e.g. CSPX LN
For the lowest withholding taxes, SG investors should choose Option 3 – Buy US stocks via an Ireland-domiciled ETF. In that case, only 15% dividends are lost, vs. 30% dividends lost for the other two options.
Let’s compare ways of getting Chinese stock exposure:
- Buying Chinese stocks directly e.g. Ping An Insurance
- Buying Chinese stocks via a US-domiciled ETF e.g. MCHI US
- Buying Chinese stocks via an Ireland-domiciled ETF e.g. CNYA LN
- Buying Chinese stocks via a Hong Kong ETF e.g. 2801 HK
Among the four scenarios, we concluded that from a withholding tax perspective, SG investors would be most disadvantaged in Option 2 (buying China Stocks via a US-domiciled ETF).
2B) Withholding Taxes – Main Takeaways
To minimize dividend withholding taxes for long-term foreign stock exposure:
- For exposure to US stocks, pick an Ireland-domiciled ETF.
- For exposure to Chinese stocks, pick a Hong Kong/Ireland-domiciled ETF. DO NOT pick a US-domiciled ETF.
- For exposure to Other Country stocks, check our summary table in this article to choose between a Local/Ireland-domiciled ETF. DO NOT pick a US-domiciled ETF.
A US-domiciled ETF may still be appropriate in certain circumstances:
- When the dividend yield for the sector is low
- For example, the SPDR S&P Biotech ETF (XBI US) has a dividend yield of 0.23% as most biotech stocks do not pay dividends. As a result, the performance drag from dividend withholding taxes is negligible.
- Other US-domiciled ETFs in our shortlist that have a low dividend yield are the tech sector ETFs such as Invesco China Technology ETF (CQQQ US), KraneShares CSI China Internet ETF (KWEB US) and ROBO Global Robotics and Automation Index ETF (ROBO US).
- Where your holding period is short
- Dividends are withheld on US-domiciled ETFs only when distributions are made. If you buy and sell a US-domiciled ETF before the dividend ex-date, you will not be subject to any dividend withholding taxes.
- Do note that the dividend for US-domiciled ETFs mentioned in this article are paid out every quarter, with the exception of Invesco China Technology ETF (CQQQ US), KraneShares CSI China Internet ETF (KWEB US) and ROBO Global Robotics and Automation Index ETF (ROBO US), which have annual dividend payout frequencies.
- When the other costs of owning the Ireland-domiciled ETF are much higher (e.g. higher total expense ratio, lower liquidity, higher bid-ask spread, higher counterparty risk)
- Some Ireland-domiciled ETFs have a much higher total expense ratio or wider bid-ask spreads compared to its US-domiciled ETF peer. Generally, this might occur if the US-domiciled ETF has attracted a much larger AUM, resulting in much higher trading liquidity and better ability to keep overall operating costs low.
3) Other Aspects to Consider When Choosing an ETF
In coming up with our ETF shortlist in Section 1, beyond looking at withholding tax considerations, we also looked at other important factors to narrow down the most cost-efficient ETFs for SG investors. They are as follows.
- Explicit ETF costs: Total expense ratio. Read APPENDIX 1 for more details.
- Implicit ETF costs: Trading Liquidity, Bid-Ask Spreads, Counterparty risks. Read APPENDIX 1 for more details.
- Potential Estate Duties: The US imposes up to a 40% estate duty for *non-US residents* (including Singaporeans), for holdings of US-domiciled Stocks/ETF in excess of US$60k. Read APPENDIX 2 for more details.
The InvestQuest’s View
The InvestQuest’s View: Having analyzed withholding taxes as well as other factors, these are the most compelling ETFs for SG investors who desire a specific regional/sector exposure – to the best of our knowledge.
Do leave us a comment if you do know of other ETFs that should be included in the list instead.
If you find this article useful, do feel free to check out our other ETF and Mutual Fund related articles too!
- SGX-listed Stock ETFs: Which are good enough for our readers?
- SGX-listed Bond ETFs: Which are good enough for our readers?
- Best ETF to buy for China Stock Exposure
- China Tech: The best ETFs and Stocks to invest in
- Ultimate List of LEVERAGED Stock ETFs
- When to use Active Mutual Funds vs Passive ETFs
- Ultimate List of Mutual Funds for SG Investors
APPENDIX 1: More details on Selected ETFs
In some cases, it was not possible/easy to find a ETF that was good in all cost-related aspects. We highlighted those less-than-optimal traits in red, in the below tables. These traits included:
- Market cap of less than USD 500 million.
- Total expense ratio of more than 0.5%
- Daily average trading volume below USD 1 million
- Bid/ask spread of more than 0.3%
In our shortlist, all the chosen ETFs are physically backed by shares. This is preferred to synthetic ETFs, which add an additional element of counterpart risk.
Selected ETFs for Regional Exposure
Selected ETFs for Sector Exposure
APPENDIX 2: Estate Duties
Estate Duty (or Estate Tax) is a one time tax that is imposed on the estate of a deceased. For more info, read this article.
Singapore has no Estate Duties. Singapore has abolished Estate Duties since 15 February 2008. This is perhaps an important factor why celebrities such as Jackie Chan, Jet Li and Gong Li have taken up permanent residence here.
However, being a Singapore tax resident doesn’t mean that you are totally clear of Estate Duties.
Individuals who own foreign assets may still be subject to the Estate Duties of foreign countries when they pass on. The most common example would be Singapore tax residents holding US stocks and property at the time of passing. An estate duty of up to 40% will apply to such assets (a more comprehensive list may be found in the table below) that are in excess of a US$60k tax exemption.
There is little guidance on how US nonresident alien (which includes Singapore-based investors) estate duties are computed. By my understanding, there are technically 12 US estate tax brackets, with tax rates ranging from 18% to 40% (image below). However, accounting for the US$60k tax exemption for nonresidents, the actual US estate duty will be at tiered rates between 26% to 40% depending on your estate size. For instance, a $80k taxable estate would subject the deceased to $5.2k of estate duty [($80k-$60k) * 26%].
Using an extreme example, if I owned US$10 million of Apple stock in my personal name and passed on, I would be liable to pay almost US$4 million in estate duties to the US tax authorities!
Again, this is what we’ve triangulated on the issue. It’s best to check with a tax consultant.
Tax law is complex and continually evolving. Singapore resident investors who are keen to invest in US stocks may potentially avoid estate duties by buying Ireland-domiciled US stock ETFs instead, which do not impose estate duties on Singapore investors.
Separately, it might be worthwhile discussing with a wealth advisor on an appropriate structure to optimize tax efficiency, particularly if you are a high net worth individual. This may involve setting up a Personal Investment Company (PIC) or a Trust structure to hold specific assets. As a PIC and Trust do not technically “die”, they may be effective tools for streamlining estate duties in some cases.
Appendix 3: What about ARK ETFs?
Given the popularity of ARK ETFs, we figured that some readers might be keen to evaluate their cost metrics as well, which we have included in the second image below.
Currently, six of their ETFs are actively-managed while two are passive (and just tracks an index).
hihi Team@IQ,
Thanks for the good read, but some pointers below.
1) Estate Duty (or Estate Tax) is commonly known as the inheritance tax or death.
i think there is a difference between an estate tax and inheritance tax.
[An estate tax is paid out of the deceased’s assets prior to the distribution of the state.
The inheritance tax comes into play after the executor of the estate has divvied up and distributed the assets to the beneficiaries. Each individual beneficiary is responsible for paying the tax.]
2) Using an extreme example, if I owned US$10 million of Apple stock in my personal name and passed on, I would be liable to pay almost US$4 million in estate duties to the US tax authorities!
i believe there is an exemption limit of USD11.4mil per individual. you might wanna double-check this.
Check the link below:
https://tickertape.tdameritrade.com/personal-finance/inheritance-tax-questions-answered-17286
Thanks!
hihi Team@IQ,
with regards to my previous comments.
2) Using an extreme example, if I owned US$10 million of Apple stock in my personal name and passed on, I would be liable to pay almost US$4 million in estate duties to the US tax authorities!
My bad, you guys are right. NRA tax exemption limits at USD60k.
Thanks!
Ryan
Thank you for pointing out the difference in estate duty and inheritance tax Ryan, I will make the amendment accordingly!
Thanks for replying me in your previous post. Great article as always.
1) As VWRA LN was launched last year which was not too long ago, will there come a time when the bid/ask spread narrow as they gain more traction? If yes, what do you think that time frame will be?
Although I agree with your suggestion in theory to get both IWDA LN and EIMI LN due to them being more cost-effective, the problem lies with the human behaviour whether the person can keep DCA into not 1 but 2 ETFs over a long period of time consistently without an auto-deduction system.
I’m using Interactige Brokers Singapore and at this juncture of my knowledge, I don’t remember seeing a good way to do this, except manually.
2) What is the difference between the two replication strategies – full and optimized?
Should we give reasonable thought/weightage to this attribute when deciding which ETF to invest in?
Hi Sharon, those are good questions.
1) I would expect the bid-ask spread of VWRA LN to narrow to ~0.1%, when it’s market cap goes up to >US$8bn (from the US$1bn currently). This is based on what the average market caps of IWDA LN and EIMI LN were before bid-ask spreads started to stabilize at that level.
In terms of time frame, it took IWDA LN and EIMI LN approx 3 years to go from US$1bn market cap to US$8bn market cap.
As you mentioned, I don’t believe Interactive Brokers offers an automated DCA system.
2) As far as I know, there are three ETF replication strategies used.
“Full” would mean that the ETF buys all the stocks in the tracked Index.
“Optimized” would mean that the ETF does buys only a representative sample of stocks within the tracked Index. This might increase the tracking error with the Index. The benefit is it may help save some trading costs when it comes to rebalancing the portfolio and also avoid having to buy very illiquid stocks within the Index.
“Synthetic” would mean that the ETF buys a derivative instrument (for example, a swap contract on a stock Index) to track the Index instead of buying shares. As the derivative instrument is traded through a broker or bank, this adds counter party risk should the broker or bank goes bankrupt.
Personally, I am indifferent between “Full” and “Optimized”. Would imagine it is more relevant to institutional fund managers who desire to operate their operates within a certain tracking error threshold.
Hope this clarifies!
Got it. 👍 Thanks!
Hi IQ!
Great website I just found today…will definitely share with my friends!
I wanted to ask about the following portfolio
– VWRA 100% > cons is that TER is 0.22% which is reasonable but i am aiming for less if possible. So… if I do something like this does it make sense?
Invesco MCI USA ETF (ER 0.05%), Lyxor europe (ER 0.07%), ishrares core MSCI emerging (0.18%) vanguard developed Asia ex Japan (0.15%), Ishares mcsi Japan (0.15%) > this would get me somewhere around 0.1% of TER depending on the balance, all are domiciled in Ireland, all have net assets 1-19 billion USD, fairly decent tracking difference, and I would DCA In each in turn (which may add to costs)…
other than that whats the negative?
Hi BYIA,
Personally I think keeping it simple and just using a blend of IWDA (ER 0.2%) + EIMI (ER 0.18) would suffice. On a separate note, China stocks are still relatively underrepresented by global stock indices (i.e. China and South Korea stocks comprise about 38% and 13% of MSCI Emerging Market Index, but China’s GDP is close to 8x that of South Korea). So it’s worth tactically adding more China exposure if you are looking to more closely replicate global economic exposure, using 2801 HK (ER about 0.2%).
For the ETFs you mentioned, while the TERs are low, there are some other issues worth considering.
– Invesco MSCI US UCITS ETF (MXUS): The Index replication strategy uses derivatives rather than being physically back by shares, which entails slightly higher risk (what if a “Lehmann” is the counterparty issuing the derivative). The bid-ask spread is also fairly wide at 0.29%, which is an implicit cost if you do sell the ETF later on.
– Lyxor Core Stoxx Europe 600 (MEUD): No issues, just that the main share class is traded in Euros. The USD-denominated share class (MEUS) has very low trading liquidity so would advise against using it.
– Vanguard FTSE Developed Asia ex-Japan (VDPX): Trading liquidity is relatively low at ~US$340k per day, which leads to a wider bid-ask spread of 0.22%.
Very good write up and compilation of the ETFs! Thanks for sharing!
Thank you for the kind comments Vince. We are really glad you found it useful!
Hello, then for a singapore investor investing in CQQQ, is the dividend lost is 37%?
Hi Anan,
While the answer is yes, you shouldn’t worry too much about it.
Most of the top holdings in the ETFs do not pay dividends and for those that do, the dividend yield is low (<1%).
There is no easy way that I know of to avoid the 10% withholding tax for dividends paid out of China domiciled companies, so what you should be most concerned of is the 30% withholding tax from the US side.
For the 30% US withholding tax, you might be relieved to know that the impact is very low for CQQQ. If you look at the dividend paid out by CQQQ in 2018 and 2019, it was approx $0.17 and $0.005 respectively, or a dividend yield of approx 0.13% on average across the two years. A 30% withholding tax on 0.13% dividend yield only sets you back 0.04%, which is pretty much negligible.
Hope this helps.
isn’t VWRA (3,455 stocks / benchmark 3,976 stocks) and IWDA (1,604 stocks / benchmark 1,654 stocks) optimised instead of full replication?
Hi Lyndon, you are right! I am using a Bloomberg data feed and it seems like it was incorrectly labelled there. I will be looking to refresh this article shortly and will make the necessary change.
However just to supplement, it seems that IWDA has grown to a large enough scale such that it is more or less using a “Full Replication” already.
Looking at IWDA vs the MSCI World Index as of 30 Sep 2020, both had the same number stocks at 1,607. ETF and Index factsheet for reference (https://www.ishares.com/uk/individual/en/literature/fact-sheet/swda-ishares-core-msci-world-ucits-etf-fund-fact-sheet-en-gb.pdf) / (https://www.msci.com/documents/10199/178e6643-6ae6-47b9-82be-e1fc565ededb)
For VWRA vs FTSE World Index as of 30 Sep 2020, the number of stocks is as you mentioned.
Hi IQ, would you compare or add in Vanguard Total China Index ETF (3169 HK) under Regional Exposure China?
Hi K, I am less inclined towards Vanguard Total China Index ETF (3169 HK) for now, as its market cap is still very tiny at US$39m equivalent, which results in very low trading liquidity (US$140k daily average volume traded) and consequently a wider bid-ask spread (~0.6%). The total expense ratio at 0.4% is also not the cheapest.
For short-term trades on the broad China market, I would prefer MCHI US (iShares MSCI China ETF) because the trading liquidity is ample (US$275m daily average volume traded), so the bid/ask spread is very tight at 0.01%. The main downside to MCHI US is that the total expense ratio is on the higher side at 0.59% and the withholding tax implications, both of which is less a concern for short-term holding periods.
If your intention is to hold the ETF for the longer-term, I would say 2801 HK (iShares Core MSCI China ETF ) would be optimal, since it has a relatively low expense ratio of 0.2% and much less negative impact from withholding taxes due to its HK-domicile. The main downside vs MCHI US is that the bid-ask spread is wider at 0.3% (which makes it less ideal for short-term trading).
Hope this clarifies.
Hi IQ, if I wanted to get exposure to India specifically, would NDIA qualify to be on your list?
Also, would you consider an ultimate list for thematic etfs like Cloud Computing, Climate Change, ESG, etc…? 🙂
Hi A,
If you have a long-term holding period, my opinion is that NDIA (iShares MSCI India UCITS ETF) is optimal, on the basis of its relatively low TER of 0.65% and dividend withholding tax implications.
However, if you intend to make short-term trades, bid-ask spreads would be a key factor. Hence, I would prefer INDA US (iShares MSCI India ETF), as it has a tighter bid-ask spread of 0.03% (vs 0.25% for NDIA).
Thank you for the suggestion on the thematic ETF list! I will definitely consider it!
Hi hello
Great summary. Just one question on the recommendation of CSPX. From what I am seeing, it has a very high trading fee of min GBP 8 / USD 12 on Saxos, and hence to really benefit from a low expense ratio, one would need to deposit 10-20 lots (roughly 10k SGD).
In that sense, it would not be practical for most to DCA in. Am I right? Or is this scenario only applicable because Saxos has abnormally high fees for this.
In all fairness, USD 12 minimum commission isn’t too bad, especially when you consider the fact that many Singapore brokers still have in place S$25-35 minimum commissions for SG stocks.
USD 12 certainly isn’t the cheapest, as I see that IBKR is at USD 5 min commission for CSPX.
Perhaps you could consider averaging into the market every 3 months, instead of each month? That might help alleviate the trading commissions over the longer run.
This is a great article – I will share it widely in my group of friends.
At this point most of my investments are in mutual funds which of course are high cost, not to mention sales charge taken by Dbs bank. Main reason is ease of setting up a regular savings plan.
Does any stock broker offer easy way to set up regular purchases of Ireland based etfs thru an RSP with flexibility to chose the funds. (Saxo seems to have something but you cannot choose the funds)
Hey Harsha, I might be wrong but I don’t think there’s any broker in Singapore that allows for RSP into Irish-domiciled ETFs such as IWDA or EIMI.
So you might have to set a calendar reminder to manually execute the trades.
If you do come across any brokers with such RSP services, do share with me too!
Hi InvestQuest, what are your thoughts on SWRD. In particular, wondering why it is not included in your recommended list. Thanks in advance.
Hi Mike,
Personally I don’t think there’s too big a difference between SWRD and IWDA.
– SWRD has a slightly lower TER of 0.12% vs IWDA’s 0.2%.
– SWRD’s AUM is significantly smaller at US$0.9bn vs IWDA’s US$37.3b.
– Perhaps as a result, the average bid-ask spread for SWRD tends to be slightly higher at around 0.08% vs IWDA’s 0.04%.
– Trading volume for SWRD is also meaningfully lower at ~US$0.5m per day, vs IWDA’s US$20m. So if you are planning to trade in sizes of over >$50k, I would just go for IWDA to avoid any price gap risk.
Hi IQ, appreciate the informative article and good list! This is kind of a beginner questions, but do you happen to know which brokers offer UCITS / Ireland domiciled funds? I am currently using FSMOne and they don’t seem to have.
Hey Wilson,
Interactive Brokers and Saxo are what I use for the UCITs ETFs.