Vanguard ETF

[rhe]

- 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?

It's a good question! This sort of uncertainty is part of the reason why I'm only using accumulating ETFs where the benefit is most obvious (European stocks), and not with my US positions.

If the Japanese government were going to come after foreign accumulating ETFs, it seems like that would likely be part of some broader Japanese-edition PFIC laws that would likely prohibit not only foreign domiciled accumulating ETFs, but also foreign domiciled distributing ETFs. The fact that Japanese domiciled mutual funds are actually allowed to accumulate suggests that this might not be a top enforcement priority, though.

[TBS]

It's a good question! This sort of uncertainty is part of the reason why I'm only using accumulating ETFs where the benefit is most obvious (European stocks), and not with my US positions.

If the Japanese government were going to come after foreign accumulating ETFs, it seems like that would likely be part of some broader Japanese-edition PFIC laws that would likely prohibit not only foreign domiciled accumulating ETFs, but also foreign domiciled distributing ETFs. The fact that Japanese domiciled mutual funds are actually allowed to accumulate suggests that this might not be a top enforcement priority, though.

Thanks for answering! One day if I have the time I will take a look at the Japanese tax law to see what it says about allowing funds to accumulate internally.

[Faxingberlin_]

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!

Do you know if deemed disposal tax (an irish tax of 41% levied on etfs every 8 years regardless of whether or not you sold the etf) applied to you if you buy these Irish domiciled etf?

[Faxingberlin_]

[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

Do you know if deemed disposal tax (an irish tax of 41% levied on etfs every 8 years regardless of whether or not you sold the etf) applied to you if you buy these Irish domiciled etf?

[TBS]

Do you know if deemed disposal tax (an irish tax of 41% levied on etfs every 8 years regardless of whether or not you sold the etf) applied to you if you buy these Irish domiciled etf?

Caveat that I've never owned any of these ETFs, but according to these threads, it appears it doesn't as long as you don't fall under any of Ireland's tax resident statuses.

[Faxingberlin_]

Do you know if deemed disposal tax (an irish tax of 41% levied on etfs every 8 years regardless of whether or not you sold the etf) applied to you if you buy these Irish domiciled etf?

Caveat that I've never owned any of these ETFs, but according to these threads, it appears it doesn't as long as you don't fall under any of Ireland's tax resident statuses.

Thanks for the reply, I checked also with an Irish tax accountant and it does not apply to investors who are not tax resident in Ireland.