A Dummies Guide to Investing in Ireland-Domiciled S&P 500 ETFs
You’ve probably heard of the Straits Times Index (STI), our Singapore stock market index. Basically, it’s a benchmark index that tracks the top 30 companies in Singapore.
And if you were to buy an index fund like an STI ETF, some benefits include:
- Lower cost of entry (Investing in one lot of STI ETF is more affordable than investing separately in 30 different companies)
- Need not actively monitor
I think that investing in an STI ETF is a good starting point for beginner investors, and a regular shares savings plan makes it even easier to grow our capital, especially when we do not have time to actively monitor the market.
But if you want to…
- diversify your investments,
- try your hand in the international market, but still
- stick to index funds…
you can consider investing in the Standard & Poor’s 500 Index (S&P 500) ETF.
Why Invest In The S&P 500?
These companies have large market capitalisations and if you go down the list, you will probably recognise many of them. The S&P 500 Index gives you greater exposure and of course, pretty attractive returns.
What Is The S&P 500?
For the uninitiated, the S&P 500 or S&P 500 Stock Market Index is the US stock market index.
It comprises the top US companies from leading industries and is commonly used as a proxy to the US stock market performance.
Some of these companies include Alphabet, Amazon, Apple, Coca-Cola, Microsoft, Netflix… etc. These are brands that have a multinational presence.
In some ways, it’s like the US counterpart to the STI.
Returns of the S&P 500 vs. the Straits Times Index
There are many reasons why you should invest in the S&P 500. Some include:
- Exposure to the international market
- Higher returns than the Straits Times Index (as seen from the chart above)
What Choices Are There If I Wish To Invest In The S&P 500?
There are a few available in the market, but these are the more popular ones:
- SPDR S&P 500 ETF (ticker: SPY)
- iShares Core S&P 500 ETF (IVV)
- Vanguard S&P 500 ETF (VOO)
These ETFs seek to replicate the S&P 500’s returns, which are considerably better than the Straits Times Index. However, expenses that will reduce your returns include:
- Expense Ratio
- Foreign Currency Risk
- Withholding Tax
I will be explaining more about these expenses below and how to reduce them.
Expense ratio (or management expense ratio) is the expense incurred to pay the managers for managing the fund.
Choosing an actively managed fund will naturally cost more per year and eat into your returns. So as an investor, you want to find an ETF with a low expense ratio.
Of the above three ETFs tracking the S&P 500 index, the Vanguard S&P 500 ETF has the lowest expense ratio of 0.03%.
Foreign Currency Risk
Since these ETFs are denominated in a currency outside SGD, investors need to be aware of the risk of currency fluctuations, during transactions and translations. You can’t really do much unless you want to do currency hedging… But that’s a whole other topic to be covered.
|Country||Withholding Tax Rate (Dividends)|
|United Kingdom||0% (tax treaty)|
Singaporeans investing in the American market are taxed 30% on our dividends as the U.S does not have a tax treaty with Singapore. For example, if the company declares a dividend that amounts to $100 to you, you will essentially only receive $70. We are exempt from capital gains (when the share price of our shares increase).
One way to go around this is to invest Ireland-Domiciled ETFs. These Irish-Domiciled ETFs benefit from the U.S./Ireland tax treaty rate of 15% on dividends.
And while this is not perfect, it certainly is more pocket-friendly than 30%.
What Ireland-Domiciled ETFs Are Available?
|ETF||Ticker Example||Trading Currency and Exchanges Traded On||Expense Ratio||Distribution Frequency|
|Vanguard S&P 500 UCITS ETF (Dist)||VUSA||GBP (London Stock Exchange); USD (London Stock Exchange); CHF (SIX Swiss Exchange); EUR (NYSE Euronext, Deutsche Börse, and Borsa Italiana S.p.A)||0.07%||Quarterly|
|SPDR S&P 500 UCITS ETF (Dist)||SPX5||GBP (London Stock Exchange); USD (London Stock Exchange); CHF (SIX Swiss Exchange); EUR (Deutsche Börse, Euronext Paris, and Borsa Italiana S.p.A)||0.09%||Quarterly|
|iShares Core S&P 500 UCITS ETF (Dist)||IUSA||GBP (London Stock Exchange); USD (London Stock Exchange and SIX Swiss Exchange); EUR (Deutsche Börse, Euronext Amsterdam, and Borsa Italiana S.p.A); MXN (Bolsa Mexicana De Valores);||0.07%||Quarterly|
|iShares Core S&P 500 UCITS ETF (Acc)||CSPX||GBP (London Stock Exchange); USD (London Stock Exchange and SIX Swiss Exchange); EUR (Deutsche Börse, Euronext Amsterdam, and Borsa Italiana S.p.A); MXN (Bolsa Mexicana De Valores); ILS (Tel Aviv Stock Exchange)||0.07%||N/A (Acc)|
Note: In the table above, “Acc” stands for accumulating. It means that dividends are actually reinvested back into the funds automatically. “Dist” stands for distributed, where dividends are distributed to investors.
Something to note about the Ireland-domiciled S&P 500 ETFs is that they tend to have higher expense ratios than their US-listed counterparts.
However, even with higher expense ratios, they are still cheaper than the higher withholding taxes you’d have to pay for investing in the American market directly!
How Can I Purchase Ireland-Domiciled ETFs?
You can invest in them through your usual brokerages (eg. DBS Vickers, POEMS, Saxo Capital, and Standard Chartered).
As long as you have an account with one of these brokerages, you can search for the stock ticker, do your due diligence, and purchase the ETF.
Depending on your brokerage, the currency deducted will be based on your account and the fund’s traded currency itself.
You can read our Ultimate Guide To Investing In Singapore, where you can find articles like which brokerage to choose. Or if the S&P500 is not for you, you can also learn about the other investment options out there.