[On :freetrade:] Vanguard S&P 500 - VUSA

Hi,

I was thinking about buying shares of VUSA. The Key Information Document makes it clear that this ETF is managed by Vanguard Ireland. Just wondering how this affects any dividends. Are the tax rules the same as in the UK?

Thanks for any replies.

Tax rules in Ireland are different, but regarding VUSA - to the best of my knowledge - you’ll see no difference. This ETF will suffer the same tax treatment - as far as I know - no additional tax.
That said you need to be mindful of the ‘UK Reporting Status’ to ensure ETF sales (outside of tax wrappers) don’t suffer Income Tax rather than Capital Gains. VUSA has Reporting Status so you’re fine.

Also bear in mind that VUSA declares and pays dividends in USD. That leaves you (at least minimally) exposed to FX rates as FT will convert for you at the prevailing rate.

Ireland does impose a dividend withholding tax. But to my knowledge it does not apply to ETFs. But were to to invest in DCC or CRH, for example, you might find you loose 20% of the dividend. These are reclaimable via a similar mechanism to the US W-8BEN system. Back in the day the system to reclaim Irish tax was painful to the point of not wanting to bother. Interesting to know what the reclamation system looks like these days are if Freetrade reclaim on your behalf. My guess would be it’s not worth their time, but you never know.

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Thanks for the reply.

Does this mean that whenever I receive VUSA dividends, they will not be taxed automatically at source (as for example individual US shares would) but rather these rules will be applied: https://www.gov.uk/tax-on-dividends ? It doesn’t seem self-explanatory from the Key Information Document.

This is probably a better explanation that what I could give…

https://www.vanguardinvestor.co.uk/need-help/answer/what-taxes-will-i-have-to-pay-on-investments

Key point to your question is the paragraph >>>>

All of our Ireland-domiciled funds and ETFs and all of our UK-domiciled equity funds pay dividends or interest gross of tax. Our UK-domiciled bond funds previously distributed interest income net of income tax at the basic rate, but from 6 April 2017 all distributions will be paid gross.”

Thanks, this was helpful.

Please add VOO (Vanguard index)

Don’t think VOO is available in the UK.

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You can’t buy this due to the MIFID II regulations that came into effect in January 2018. They’re not available to retail investors. You’ll have to choose another one

Edit: I’ve removed the link because I linked EUR/USD held S&P 500 ETF’s and I’m not sure how to get GBP up for you

Recommendations for best S&P available on Freetrade ?

There’s 3 I believe but I’m not a user yet and they’re in GBP so can’t really help you there.
The 3 I think are there are IUSA VUSA CSP1

The UK version would be VUSA. It’s a tad more expensive though iirc.

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They are all exactly the same (cost wise). The tracking error on the Vanguard one is slightly worse (however the difference is so small it is not noticeable).

The only difference is the absolute price between the Vanguard and iShares options. The second iShares option is also accumulating (so the value of each share grows over time).

Exactly this, @dwhitworth1990. Sadly, we can’t offer ETFs that are listed on US exchanges because the providers don’t produce KIDs (Key Information Documents), which is a regulatory requirement.

You have a selection of UK-traded S&P 500 ETFs on your app, including from Vanguard and Blackrock (iShares). Always do your own research.

Mind clarifying what you mean by this? Sounds like a good thing, but when comparing their pricing info I got the impression that iShares is cheaper than Vanguard in the short-term but more expensive in the long run.

An accumulating ETF means all dividends are reinvested into new shares of the ETF (rather than paid out in cash). This means you earn more a year than if the cash was paid out to you (as the money does not sit with the ETF provider until the end of the quarter but rather is reinvested the moment it arrives.

However, I never use this option as it means you can’t choose where dividends go (i.e. seek better opportunities). It all depends on your personal circumstances etc. as dividends will be taxed but accumulation will only be taxed when you sell.

Happy to explain further if anything is unclear.

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So the value of ETF should go up because everyone’s dividends are always reinvested straight away? If that’s the case then how come is the Vanguard ETF not only worth more but appears to do slightly better than the iShares one?

Also if they always reinvest the dividends then does that mean you’ll never get any cash unless you sell?

If the latter is true then I can definitely see why you prefer not to use them, and why I’m better off with Vanguard too.

Correct - income ETFs will pay out dividends as cash, accumulating ones revinvest dividends back into the ETF.

With the former, you always have the option to use that cash to invest in something else, as mentioned by @hrochfor1, or if you have retired, live on that income, without having to sell (if the income is enough).

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Not sure where the performance difference comes from as the two should essentially perform the same (see below).

The price of each share is meaningless (just an arbitrary number) however you get one share for less money on the iShares one so that seems to be a competitive advantage.

I can see the advantage of an accumulating ETF especially if you’re happy just sticking to the one or if you’re inexperienced/don’t know what else to invest in etc.

Or say in my case I put money into my employers share scheme which does this (so only one stock rather than a portfolio), and it should help the value increase for when I’m able to withdraw it (after 3-4 years iirc)

But in Vanguard vs iShares case I just can’t see any advantage especially when it seems to perform worse than Vanguard even with the guaranteed reinvestment. Aside from the fact that it’s cheaper.

The S&P500 dividend yield is so low it does not make a huge difference to performance (seems to be around 15% difference over 3 years which is not to be sniffed at).