Vanguard ETF

[rhe]

For international, Vanguard offers Irish-domiciled accumulating ETFs. These are difficult to find by clicking through on the website, but show up if you search on google. For example,
<https://global.vanguard.com/portal/site ... ocId=31799>

My strategy is to claim the 10% tax withholding deduction on my (US domiciled) US investments, and use Irish-domiciled accumulating ETFs for most of the non-US international.

For people below the fee-waiver threshold for interactive brokers, I think I agree with you that they should probably stick with domestic options for non-US international. If you have more, though, I don't think any domestic option is going to be able to beat IB. In some cases (e.g. France), it looks like you can actually get a Luxembourg domiciled accumulating ETF that doesn't seem to have any tax withholding at all.

What's the advantage with Irish ETFs over Japanese mutual funds? I know that Ireland doesn't levy its own withholding tax on ETF distributions, but the underlying stocks are still subject to each country's withholding tax.

There's no one killer feature, but there were a lot of smaller things together that made me go with the Irish ETFs:

1. Reported expense ratios were generally (although not always) lower. The link above, for example, has a 0.22% ER, which is substantially lower than most (all?) Japanese "emerging markets" mutual funds.

2. Japanese mutual fund holdings sometimes seemed to rely on holding some other fund, which potentially introduced additional fees or taxes. If I'm remembering correctly, there were "emerging markets" mutual funds that held most of their stock through ADRs in New York. This introduces an unreported ADR fee, sometimes 0.5% or even higher. Some of this is unavoidable, but if you check the annual report (around p.144) at
https://www.vanguardinvestor.co.uk/rs/g ... nts/959/gb
you can see that vanguard is making very limited use of ADRs, and mostly only for China where they may be the best or only way for foreign investors to hold the stock.

3. Position reporting didn't seem to be as good. If you look at the vanguard annual report, you can see exactly what instrument they're holding, and the list goes on for pages and pages. The "statement of operations" table (around p. 163) lists foreign withholding tax, so it's easy to see you're losing about 10% of your dividend to foreign tax. It was very difficult to find this information for Japanese mutual funds, where they seemed to often report only net dividends.

I seem to remember one exception to this was emerging market bonds, where there was a Japanese mutual fund that had substantially lower ER and seemed to actually hold the bonds itself. I had some of that for a while.

In general, the vanguard ETFs have negative tracking difference (emerging markets outperformed the index by 0.20% last year) because they take advantage of tax treaties while the net return index doesn't. Often I would see Japanese funds that matched the index exactly. Where are the savings from the tax treaties going? Unclear, but apparently not to the investors in the fund!

[adamu]

The link above, for example, has a 0.22% ER, which is substantially lower than most (all?) Japanese "emerging markets" mutual funds.

eMaxis Slim's emerging market fund is 0.187%.

https://emaxis.jp/fund/252878.html

3. Position reporting didn't seem to be as good. If you look at the vanguard annual report, you can see exactly what instrument they're holding, and the list goes on for pages and pages.

Here's the report:

https://emaxis.jp/pdf/zenunyou/252878/2 ... 200427.pdf

[fools_gold]

Position reporting didn't seem to be as good. If you look at the vanguard annual report, you can see exactly what instrument they're holding, and the list goes on for pages and pages. The "statement of operations" table (around p. 163) lists foreign withholding tax, so it's easy to see you're losing about 10% of your dividend to foreign tax. It was very difficult to find this information for Japanese mutual funds, where they seemed to often report only net dividends.

Like you, I've tried to look for withholding taxes in reports for Japanese funds in the past but I've never been able to find them. Unless I'm reading it wrong, they just report net dividends. It would be nice if we could find out somehow.

In general, the vanguard ETFs have negative tracking difference (emerging markets outperformed the index by 0.20% last year) because they take advantage of tax treaties while the net return index doesn't. Often I would see Japanese funds that matched the index exactly. Where are the savings from the tax treaties going? Unclear, but apparently not to the investors in the fund!

According to the report you posted, the Vanguard ETFs actually underperformed the index by 0.2% last year. Outperformance would mean a positive tracking difference. I think it was -0.1% for EmaxisSlim.

[rhe]

According to the report you posted, the Vanguard ETFs actually underperformed the index by 0.2% last year. Outperformance would mean a positive tracking difference. I think it was -0.1% for EmaxisSlim.

Good catch. I got confused with the European ones. Dividends are higher in Europe and so are withholding rates, so the tax treaty issue matters more. Looking at the annual report it looks like Vanguard beats the net return index by about 0.15% for all Europe, or 0.20% for continental Europe.

A few years ago when I was looking at this, I ran into a number of European stock ETFs that magically had zero tracking difference with the net return index, where this wasn't completely explained by their higher expense ratio. The money just seemed to disappear somewhere. It's one of the things that's made me reluctant to invest in anything without looking at it pretty carefully.

[rhe]

The link above, for example, has a 0.22% ER, which is substantially lower than most (all?) Japanese "emerging markets" mutual funds.

eMaxis Slim's emerging market fund is 0.187%.

https://emaxis.jp/fund/252878.html

3. Position reporting didn't seem to be as good. If you look at the vanguard annual report, you can see exactly what instrument they're holding, and the list goes on for pages and pages.

Here's the report:

https://emaxis.jp/pdf/zenunyou/252878/2 ... 200427.pdf

That one looks like a nice exception! I think the emerging market bond fund that I had was a different fund family, so that means there are at least two companies that are putting out good funds. If I remember correctly from when I looked at this a few years back, developed Europe and developed Asia Pacific (ex-Japan) were the two parts of the world where it was hardest to find good Japan domiciled funds. The regional funds might not matter if you're only buying a single world equity fund, but I've got a bunch of US equity in a 401k and buy more Europe elsewhere to balance it out.

One additional consideration for me is that (notwithstanding registering here) I may not retire in Japan. If I remember correctly, capital gains taxes are due on money in Japanese brokerages when you leave, but for certain working visas there is no exit tax on foreign accounts.

[Kanto]

That one looks like a nice exception! I think the emerging market bond fund that I had was a different fund family, so that means there are at least two companies that are putting out good funds. If I remember correctly from when I looked at this a few years back, developed Europe and developed Asia Pacific (ex-Japan) were the two parts of the world where it was hardest to find good Japan domiciled funds. The regional funds might not matter if you're only buying a single world equity fund, but I've got a bunch of US equity in a 401k and buy more Europe elsewhere to balance it out.

One additional consideration for me is that (notwithstanding registering here) I may not retire in Japan. If I remember correctly, capital gains taxes are due on money in Japanese brokerages when you leave, but for certain working visas there is no exit tax on foreign accounts.

If you have a 401k, then I assume you are filling American taxes? You certainly would not want any PFICs then, right?

However, for someone not looking to retire in Japan, and does not know where they will retire, holding funds with IBKR seems to be the standard recommendation. The minimum deposit and the lack of tax support make it a poor choice for many beginning investors though.

[TBS]

[Edit Apr 30, 2021: If anyone is thinking of investing in foreign domiciled products that accumulate internally, it would be prudent to check how the Japanese tax office will treat notional distributions and any subsequent capital gains from them.]

rhe has raised some great points in this thread. These Vanguard accumulating ETFs have a number of advantages, which will make them attractive for some:

- If you are not planning on staying in Japan long-term, you will be able to keep your ETF units when you leave if e.g. Interactive Brokers let you transfer your account to your new country. This avoids having to sell on exit and pay Japanese capital gains taxes.
- The Japanese tax treatment with respect to dividends looks broadly identical to Japanese mutual funds: they can re-invest internally only having to pay foreign withholding taxes. [Edit Apr 30, 2021: I am no longer sure about this, check it out if you are thinking of investing this way.]
- The fund costs are low.
- You can do everything in English, from researching to trading, which many will appreciate.

On the flipside however:
- You will have to buy via a foreign broker unless your Japanese broker offers access to the European markets where these ETFs are listed. This means you cannot use tax advantaged accounts like NISA or Tsumitate NISA. They are ETFs so iDeco is also out.
- From this point, if you sell while resident in Japan you'll have to file a Japanese tax return (reporting is more complicated). If you have capital losses, you won't be able to carry these forward via a 損益通算.
- You may incur trading costs or have to pay account fees.
- Depending on how you fund the foreign broker, there may be currency conversion costs and transfer fees. These will drag the overall growth from the outset.

It then becomes a complicated calculation, depending on personally how you invest, to work out whether a investing via Japan or via these ETFs is best. It cannot simply be answered by comparing the fund costs or the tracking differences to the benchmark index. That said, both the eMaxis Slim and the Vanguard Accumulating ETFs look like excellent products and buying either of them will be a wise investment of your money.


@fools_gold: From the screenshot you posted it looks like the Vanguard accumulating emerging markets ETF actually underperformed the benchmark by 0.13% - annualized value based on the period Sep 26, 2019 (when the ETF started) to Jun 30, 2020.

This PDF that @rhe linked to earlier implies the ETF unperformed the benchmark by 0.82% for the year running April 1, 2020 to Mar 31, 2021, but only by 0.49% since its inception.

The fluctuation of these numbers is quite normal, but it makes it is hard to gauge the long term tracking difference using only one of them. Today I tried calculating a more robust value for the tracking difference by fitting data over a long period and comparing against the eMaxis Slim Emerging Markets fund. However it was difficult to get numbers I was happy with as I could only find monthly historical data for FTSE Emerging Markets Index. A direct comparison is difficult anyway, as the eMaxis fund tracks a different index (MSCI Emerging Markets). The FTSE index contains more stocks (1864 vs 1392), but does not cover the quite the same territories (it doesn't include Korean stocks, for instance).


@adamu: You may already be aware, but the eMaxis Slim Emerging Markets fund expense ratio dropped to 0.18645% in January when its assets crossed 500 oku yen. It'll drop again to 0.1859% when the assets go over 1000 oku yen.


@rhe: You mentioned earlier that you claim the 10% withheld US dividend tax against Japanese dividend taxes for your US-based investments? Does that mean you are holding some distributing ETFs? One thing to be aware of is that you might be paying tax earlier than necessary this way, so missing out on compounding that would be to your benefit if you invested via a Japanese-based mutual like eMaxis Slim instead. I talk about this point in these threads. It is not a make or break point, just leaving it here for others as well.


Here is a list of some more of these Vanguard accumulating ETFs that people may wish to look into. These are all domiciled in Ireland and can be bought in GBP, USD or EUR via the London, German or Italian Stock Exchanges

Fund / Expense Ratio / Benchmark Index
- Vanguard FTSE All-World UCITS ETF / 0.22% / FTSE All-World Index
- Vanguard FTSE Developed World UCITS ETF / 0.12% / FTSE Developed Index
- Vanguard FTSE Emerging Markets UCITS ETF / 0.22% / FTSE Emerging Index
- Vanguard S&P500 UCITS ETF / 0.07% / S&P 500 Index

[rhe]

If you have a 401k, then I assume you are filling American taxes? You certainly would not want any PFICs then, right?

For some reason a lot of foreigners close their 401k accounts when they leave the US, but this is actually not required. You had to be a "US person" when you were putting money in, but at least with my provider you don't have to stay that way in order to keep the account open.

[rhe]

@rhe: You mentioned earlier that you claim the 10% withheld US dividend tax against Japanese dividend taxes for your US-based investments? Does that mean you are holding some distributing ETFs? One thing to be aware of is that you might be paying tax earlier than necessary this way, so missing out on compounding that would be to your benefit if you invested via a Japanese-based mutual like eMaxis Slim instead. I talk about this point in these threads. It is not a make or break point, just leaving it here for others as well.

Yes, I hold my US stocks in a US domiciled ETF. I then claim the Japanese tax credit on the IRS 10% withholding tax. One advantage of doing this is that a broad range of funds are available: in my case, I chose to go with the Vanguard small-cap value fund. For a while this looked like a bad choice, but it is now picking up again.

An additional advantage of having some distributions is that I can use free wire transfers from Interactive Brokers to top up foreign bank accounts. Getting money in and out of Japan seems to always involve fees and paperwork, so I'm happier just using money that is already outside of Japan for purchases abroad.

[TBS]

- The Japanese tax treatment with respect to dividends looks broadly identical to Japanese mutual funds: they can re-invest internally only having to pay foreign withholding taxes.

This thread on r/JapanFinance highlighted something that I did no realize when I wrote the above. Offshore accumulating investments may structure the internal re-investments using "notional dividends" or "notional distributions", and provide annual statements for these to investors for foreign tax purpose, e.g. in the UK. There does not seem to be a clear answer for how the Japanese tax office would tax notional dividends and any capital gains that result from their reinvestment.

@rhe: Does Vanguard provide you with statements of notional dividends the accumulating ETFs you hold? Do you have any experience as to how the Japanese tax office deals with this?