Author Topic: Offshore USD ETFs - Accumulating or Distributing?  (Read 576 times)

FreedomFinder

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Offshore USD ETFs - Accumulating or Distributing?
« on: February 14, 2020, 07:01:02 pm »
Hey Guys!

I've just started investing USD with Interactive Brokers about 6 months ago. I had been investing in US-Domiciled portfolio of ETFs, currently 70% US Equity (VTI), 20% international Equity (VXUS), and 10% Global Bonds (BNDW). I now I realize that I should probably switch to the Irish-domiciled equivalents. I'm thinking of a simple 2-fund USD portfolio - 90% Global Equity (probably VWRA) / 10% Global Bond (probably (VAGU).

My question is, which type of ETF is more tax efficient for South Africans? If I buy Accumulating ETFs where the dividends are reinvested automatically within the fund, are we still charged normal tax on that, even though it's not distributed? If so, is it better to just buy distributing ETFs? I can't find any information with SARS regarding how this is handled.

Thanks for the feedback.

Patrick

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Re: Offshore USD ETFs - Accumulating or Distributing?
« Reply #1 on: February 15, 2020, 05:06:19 pm »
All other things being equal, if your record keeping is impeccable accumulating will come out a minute fraction ahead due to you saving re-investment fees. The problem is that it's incredibly hard to prove to SARS that the current price of an accumulating ETF isn't actually what the share ticker says but that it's in fact much lower as the ticker price includes reinvested dividends.

I don't feel like having that future fight with SARS so I buy VWRD instead of VWRA. My brokerage fees to re-invest dividends are only around 0.08% in any case.

Ps. The estate duty on US held stocks only becomes higher than SA estate duty at over $200k, plus you can claim back the dividend taxes paid to the US government, and the TER of VT is only 0.09% vs 0.22% for VWRD. Just something to consider...

FreedomFinder

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Re: Offshore USD ETFs - Accumulating or Distributing?
« Reply #2 on: February 16, 2020, 10:38:49 am »
Hi Patrick. Alright awesome. So if I understand you correctly, there's no difference in the way dividends are taxed by SARS between the two types of funds, but you might actually over-pay on CGT with the accumulating funds because the dividends are baked into the asset price (unless proven otherwise)? If that's the case, then it sounds like distributing funds like VWRD are absolutely the way to go.

Also, you make a good case for staying with US funds for a while. I may do just that and look into investing in the Irish funds when I'm more informed and closer to the 200k mark. I've been eyeing out VT for a long while. I seem to find a hundred reasons to justify over-weighting US equity in my portfolio but sometimes I wonder if its just recency bias..

The other huge benefit of VT is that I can buy fractional shares of US-domiciled ETFs on IBKR which really simplifies my contributions and reinvesting. And it doesn't seem like this is possible with non-US ETFs on the platform (?)

Patrick

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Re: Offshore USD ETFs - Accumulating or Distributing?
« Reply #3 on: February 17, 2020, 08:52:27 am »
Hi Patrick. Alright awesome. So if I understand you correctly, there's no difference in the way dividends are taxed by SARS between the two types of funds.
The other huge benefit of VT is that I can buy fractional shares of US-domiciled ETFs on IBKR which really simplifies my contributions and reinvesting. And it doesn't seem like this is possible with non-US ETFs on the platform (?)
Correct
The other huge benefit of VT is that I can buy fractional shares of US-domiciled ETFs on IBKR which really simplifies my contributions and reinvesting. And it doesn't seem like this is possible with non-US ETFs on the platform (?)
Cool I never actually knew they offered that.

FreedomFinder

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Re: Offshore USD ETFs - Accumulating or Distributing?
« Reply #4 on: February 17, 2020, 10:22:31 am »
Thanks for clarifying.

Cool I never actually knew they offered that.

Yeah, its not very apparent. It's hidden in the trading permissions. There's a checkbox for US fractional shares. Although, I think they can only be bought through the web platform, as opposed to IBKR Mobile.

Andrew Giantmam

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Re: Offshore USD ETFs - Accumulating or Distributing?
« Reply #5 on: February 20, 2020, 09:18:13 am »
Good morning house, please which international broker do you recommend for US equities and ETFs in term of cost effectiveness. I do not want Easy Equities.
Thanks

Pax

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Re: Offshore USD ETFs - Accumulating or Distributing?
« Reply #6 on: February 21, 2020, 12:04:01 pm »
I've just come across Mexem (mexem.co.za).

They are an introductory broker for Interactive Brokers in the US. They claim to give you the same investment products, spreads and fees (minus the monthly $10 account fee) as Interactive Brokers. Furthermore they indicated that they are also willing to respond to the directives of a South African will. This now seems to be the easiest way for a South African to go offshore for small amounts of money. I'm definitely going to give them a try.