In another Turtle Investor exclusive, some of you would be delighted to know that Vanguard will be launching a new S&P 500 ETF to be listed in Hong Kong in 2015 around the month of June. Slightly disappointed that it isn’t a global index, but we shall look at it as baby steps, huh? With indexes tracking Japan, Asia Ex-Japan, Europe and soon-to-be US, it is only a matter of time before a total US market and a global index tracker pops up.
Wait a minute – you don’t have to start Googling right away since you will most likely not find anything on this. Not yet, anyway.
Kyith from Investment Moats was kind enough to give my blog post on Establishing A Bogleheads Portfolio a plug earlier on. In a brief comments exchange, he mentioned that perhaps we should write in to Vanguard HK regarding a global index ETF.
Well, why not? I took action! Spent a couple of minutes and dropped Vanguard Hong Kong a short email.
Their response was swift indeed. On the next working day, I got a reply in my mail from Vanguard HK :
Thank you very much for your email and your interests to Vanguard.
Currently, Vanguard has four SFC authorized ETFs listed at the Hong Kong Stock Exchange.
And, we will have our S&P 500 ETF list in Hong Kong next year around early June.
As Vanguard Hong Kong office is the hub of Asia, we are in processes to launch more products in the near future. Please stay tuned to wait for further information
It would seem than Vanguard sees the Hong Kong office as an important component and an entry point into the Asia market.
Come to think of it, most of the sales and customer service correspondence I’ve communicated with are pretty responsive, which was how I found out about the amended distribution dates for Nikko AM STI ETF and ABF Singapore Bond Index Fund since they don’t exactly make such announcements on their websites.
Why Buy S&P 500 ETF in Hong Kong instead S&P 500 in US?
A little research has thrown up a little problem of estate/death tax of 40% in excess of US$60,000 for foreign investors in US. Let’s say Xiao Ming have US$160,000 invested in the US. Upon his death, 40% x (US$160,000 – US$60,000) = US$40,000 will be paid to the US goverment. Ouch, and not forgetting there is 30% dividends withholding tax in the US.
Lucky for us, both estate tax and dividends withholding tax does not apply to Hong Kong which makes it attactive. However, do share with me if you are aware of potential problems regarding investing via the Hong Kong Exchange as I do not have experience doing so.
The estate tax part still applies, because the ETF is Hong Kong domiciled.
However, a clarification needs to be made on the part on dividends withholding tax because my above statement is somewhat incorrect. The S&P 500 index ETF is a Hong Kong domiciled ETF. US tax is withheld at source on dividend distributed by HK listed S&P 500. The dividend withholding tax is at 30% for S&P 500 ETF. It will be paid by the fund, thus the impact for an investor will be a 30% less dividend when our ETF distribute dividend.
Please see scenario 4 at this link – http://www.turtleinvestor.net/get-to-know-dividend-withholding-tax/
Why not buy S&P 500 ETF in Singapore?
The diligent investor in all of you might wonder, don’t we have SPDR S&P 500 ETF (S27) listed on SGX? No estate tax, no dividends withholding tax either.
Again, an update is required to my incorrect statement above because I had assumed SG taxation rules apply because it is listed in SG. Apparently, S27 is US-domiciled but listed on SGX, which means US taxation rules could apply, I think. To be honest, I’m not sure. Checking S27 prospectus : 18. Important Tax Information –
(1) On Dividend Withholding Tax
.. Non-US Holder will generally be subject to US federal withholding tax at a rate of 30% (or lower rate under an applicable tax treaty). There is currently no income tax treaty between the US and Singapore.
(2) On Estate Tax [grey area]
Prospective purchasers of Units are urged to consult their tax advisors with regard to the application of the US federal income and estate tax laws to their particular situations, as well as any tax consequences arising under the laws of any state, local or foreign taxing jurisdiction. [meh.]
From what I can see, the current price per unit is about US$200, with a board lot size of 10. A minimum of US$2000 per purchase doesn’t sound that affordable to the average investor. On the contrary, Vanguard’s ETFs in Hong Kong are currently all under HK$20 with a board lot size of 100. Per purchase works out to less than SGD$350 which is much more affordable.
By the way, Singapore’s version of iShares Core S&P 500 ETF is dead in the water. With effect from 14 October 2014, the iShares Core S&P 500 ETF has ceased to be offered to retail investors in Singapore. Low volume might be a likely problem, which also affects SPDR S&P 500 ETF (S27).
Oh, did we forget about Lion Global Investors Infinity U.S 500 Stock Index Fund which is essentially the same thing? Plus 2% initial charge, 0.475% management fee, 0.92% expense ratio. (Vanguard S&P 500 has expense ratio of 0.05%) Likely to be dead in the water, too.