Another chapter in the index investing saga!
I limited my search for Vanguard index funds to euros. Now that I discovered the tax leakage due to a 15% witholding tax and understand more about that…the dollar version might be very interesting. The Dutch IRS will phone me back tomorrow, so I can ask them questions about this tax thing. Investing with Vanguard in euros means a 15% dividend leak. Holland does not have a tax treaty with Ireland concerning witholding tax dividends…so 15% dividend is lost.
However, we do have a treaty with the U.S.! The Dutch (and probably many other European folk) can ask for a witholding tax return (15%) by filling in a W8-BEN form (this link offers instructions for the Dutch). (For the Dutch: deze belasting is verrekenbaar met de vermogensrendementsheffing in box 3 en klik ook hier.) You can find the W8-BEN form here. With this form you declare to be a non-U.S. citizen and can ask the U.S. to kindly return the dividend tax you paid.
I am also curious as to whether you’d get the full 15% if investing in U.S.-only stocks and not the full amount if you choose a world-wide fund, since the American fund needs to pay dividends to countries outside the U.S. as well. (Feedback is welcome!)
Based on this I’d say investing with Vanguard in dollars via the U.S.-based funds sounds rather tempting. The Irish domiciled euro version always implicates a 15% witholding tax loss, wheras with the U.S. domiciled dollar version a witholding tax leakage loss is preventable. Also: TERs are much lower! (You’ll notice in the table coming up!)
Please note: I am still waiting for the Dutch tax department to phone me back and answer my questions about this dividend witholding tax and how best to go about it.
There obviously is a currency risk for Europeans when investing in dollars. However, most index funds track an index which is set up in dollars. The fund then converts all purchases and value to euros…but I don’t think this eliminates the currency risk? So there’s also a currency risk when investing in euros? (Feedback is welcome!)
I have compared six Vanguard funds via Morningstar.nl The latter two (REITs and bonds, the inflation and deflation hedges) are not interesting for us at this moment because we’re in the wealth-building stage.
Vanguard ETFs in dollars via BinckBank
|Vanguard Tot Stock Market ETF||Vanguard Total World Stock Index ETF||Vanguard FTSE All-World ETF||S&P500 ETF||Vanguard REIT Index ETF||Vanguard Total Bond Market ETF|
|Stock Exchange||NYSE ARCA||NYSE ARCA||London Stock Exchange||NYSE ARCA||NYSE ARCA||NYSE ARCA|
|ISIN||US9229087690||US9220427424||IE00B3RBWM25 (via Ireland!)||US9229083632||US9229085538||US9219378356|
|Index||S&P500 TR USD||MSCI ACWI Ex USA NR USD||MSCI World NR USD||S&P500 TR USD||MSCI ACWI NR USD||Barclays US Agg Bond TR USD|
|Amount of stocks||3609||5109||2570||504||126||15880 (bonds)|
|+||Super low TER!Possible tax return W8-BEN||TER is acceptable.Possible tax return W8-BENBroad diversification||Broad diversification||Super low TER!Possible tax return W8-BEN||Low TER!Possible tax return W8-BEN||Low TER!Possible tax return W8-BEN|
|–||Dollars (currency risk)U.S.-only asset allocation||Dollars (currency risk)||Dollars (currency risk)
No tax return
|Dollars (currency risk)S&P500 U.S.-only asset allocation||Dollars (currency risk)U.S.-onlyNot interesting during the wealth building phase||Dollars (currency risk)U.S.-onlyNot interesting during the wealth building phase|
|Conclusion||++||++||—||+||+- (future +)||+- (future +)|
Uhoh….I’ve just switched my favourite from the FTSE All-World to Total Stock for obvious reasons.
What do you think?
Addendum: Binck charges €9.50+0.15% transaction costs for purchases made on the U.S. NYSE. NYSE Euronext Amsterdam will cost €6.50+0.10% when purchasing or selling. Thanks, Monique!
Disclaimer: I am not a professional investor nor do I claim to be one. You are solely responsible for your own financial and investment choices. I am not responsible for inaccurate information in any of my blog posts. I am merely sharing ideas and findings of my very amateurish investigation in index investing.