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Total costs

When assessing the best portfolio, it is important to look at the costs, including: the Total Expense Ratio (TER), any lending income, whether there is a dividend leak advantage, the effect of any taxes, and the actual return.

Broker costs are relevant, however they should not drive the choice of portfolio as for a long term strategy it is better to adjust the broker to the portfolio and not the other way around.

Beware of “bargain brokers”, which hope to grow quickly with a temporary lure. Investments are long term.

Domicile and dividend leak

The domicile of an ETF (/ fund) determines which tax regime applies. This then concerns tax that is levied on dividends to the fund and any tax that is levied on the distribution of dividends. Ireland and Luxembourg do not have to charge dividend tax on distribution.

The ETF (/ fund) must pay tax on the dividend received, depending on the domicile there may be a treaty that reduces this payment. Ireland, for example, has a treaty with the US, just like the Netherlands, whereby the US dividends tax impact decreases from 30% to 15%. Ireland has no withholding tax when it pays dividends, so the total “dividend leak” for the US is 15%. Luxembourg does not have this treaty, so the tax remains 30% of the dividend. If the domicile is the Netherlands, the US tax will be reduced to 15%, just like in Ireland. The Dutch ETF (/ fund) shifts the withholding tax of 15% on the payment of dividend, which you can set off against your income, so that you effectively pay 0% as Dutch citizen.

Ireland and Luxembourg are easy to compare because UBS offers the MSCI USA index from both Ireland and Luxembourg. Assuming a 2% dividend, Ireland should outperform 15% * 2% = 0.3%. In 2018, the Irish variant outperformed 0.22%, 0.30% in 2017, 0.34% in 2016, 0.24% in 2015. The 0.3% therefore indeed appears to be correct. The difference per year can possibly be explained by the fact that it takes a while before the tax is indeed received back.

If you compare Ireland with the Netherlands as domicile, there should be no difference in terms of US yield (after all, the treaty reduces the tax from 30% to 15% for both domiciles). However, there is an EXTRA advantage of 0.3% on the USA portion for the Dutch domicile, because you can get it back through the tax authorities. If you assume 60% USA in the World index, the Dutch advantage is therefore 0.18% compared to an Irish domicile (and 2 * 0.18% = 0.36% compared to a Luxembourg domicile).

cost.txt · Last modified: 2020/06/15 05:19 by dreas