Japan-based low-fee global index fund?

[adamu]

I also forgot: that article works off a theoretical scenario that both VT and rakuten-vt are inside of a nisa account. This is of course impossible(vt can't go in).

Sorry I've not looked at your spreadsheet yet, I just wanted to respond to this point. VT can go into a NISA, I do that. Just a regular one, not a 積立 one.

[jcc]

I also forgot: that article works off a theoretical scenario that both VT and rakuten-vt are inside of a nisa account. This is of course impossible(vt can't go in).

Sorry I've not looked at your spreadsheet yet, I just wanted to respond to this point. VT can go into a NISA, I do that. Just a regular one, not a 積立 one.

I didn't think of that. But I do think that the case for not using ETF's in the NISA is very clear cut: your dividends won't be reinvested in the nisa account so the reinvestment won't be tax free, so you will a) pay tax on the dividends of the reinvested dividends and b) pay tax on the capital gains of the reinvested dividends, while the fund will "put" those dividends in the nisa without using up your nisa allowance where they can continue to compound and stay entirely tax free. Those numbers will mean the ETF will get left in the dust by any half-decent fund(let's say <.5% total costs) that reinvests internally, and there's no argument at all. Unfortunately I only figured this out after I filled half my nisa allocation for this year with ETF's.

[adamu]

Talking purely about the Rakuten vs Core VT, I don't think it's as clear-cut because the Rakuten fund's fees are more than double. It's a huge difference. According to the article, the fund came out below on a 20-year investment of 400k a year. If you invested more or for longer, it gets even more expensive.

But I agree a nice low-cost domestically-listed fund would be ideal, hence this thread.

[jcc]

The article is using a tsumitate nisa which doesn't allow straight up vt so the numbers it pushes out are a moot point. It also assumes .4% all-in costs(adding nearly .2% for turnover costs) which I feel is pushing it a bit. You asked about a non-nisa comparison and the spread-sheet I made is that. In a non-tsumitate nisa the results would again be different, but remember, a non-tsumitate is only tax-free 5 years and needs a whole different set of numbers run on it.

eMaxis slim global stock is barely over .1% management cost. It's based on msci global(minus japan)

It doesn't include japanese stock, so if you want to buy into the japanese market too, you can just pick up a separate domestic fund.

The crux of the issue really lies in one place: how much hidden costs the funds have over the etfs.

My personal opinion is that the rakuten vt fund is not a good choice but it's practical for straight up comparison against vt. Nissei MSCI-japan has shown total costs(including hidden) of .27% Other low-cost funds I couldn't find figures for. Just plugging that numbers(v.s. the .1% that does not include turnover costs) into the spread-sheet I made shows a clear win for funds in a non-taxed account. The fund wins even more if you go with a 50/50 split of dividends/growth (the higher the dividends ratio, the greater the fund advantage)

If the real costs really have a difference of .3% the difference is more or less negligible. It's a slight win for the ETF if capital gains heavy, and it's a slight win for the fund if the value/dividends split is 50/50. Please poke around with a copy of the sheet and see for yourself.

Now I think that there are funds(and I don't include rakuten vt in there) out there where the total costs are less than .3% of total costs for comparable etfs, and that's why I'm putting my money on domestically run funds(inside nisa or outside) unless I learn something new.

[jcc]

Ugh, this is really complicated to calculate and some of the rules are a bit unclear. There may be an additional bump (that affects funds more than etfs):

According to that article, the US tax is retained internally in the fund on dividends. So that's where the 10% tax in the article was coming from. The larger issue though is that as this gets reinvested, how does that get treated in regards to capital gains? Do you pay 10%, with the remaining 90% of the dividends going back into the fund(increasing its value), which then gets counted as capital gains(so when you cash out you get taxed 20% on that remaining 90%?). Or do you get charged only the balance(10%) or have a way to get a tax refund? Further, that 10% is on us stocks.

So the rakuten-vt deal could be pretty bad because even though vt is only 50% us stocks, the whole setup gets taxed by the US: a strong argument for avoiding any fund that wraps a US-domiciled asset.

What this all boils down to is that... we still need more information but the rakuten-vanguard wrapper funds seem like a bad idea compared to domestic, so if you do go for fund over vt etf, choose local

[RetireJapan]

I also forgot: that article works off a theoretical scenario that both VT and rakuten-vt are inside of a nisa account. This is of course impossible(vt can't go in).

Hate to nitpick but I am guessing you mean inside of a tsumitate NISA account. I have VT in my ordinary NISA account

[fools_gold]

So the rakuten-vt deal could be pretty bad because even though vt is only 50% us stocks, the whole setup gets taxed by the US: a strong argument for avoiding any fund that wraps a US-domiciled asset.

What this all boils down to is that... we still need more information but the rakuten-vanguard wrapper funds seem like a bad idea compared to domestic, so if you do go for fund over vt etf, choose local

The Rakuten VT fund is still a bit new so I thought I'd compare the Nikkei fund to the equivalent SBI EXE-i fund, which is also a wrapper for US ETFs. Between October 2014 and now the EXE-i fund came out on top, despite having a higher expense ratio. Unfortunately, the funds track a slightly different benchmark, so it's a little difficult to say where the difference lies. It could be that the underlying ETFs are managed more efficiently.

[adamu]

Hate to nitpick but I am guessing you mean inside of a tsumitate NISA account. I have VT in my ordinary NISA account

Hate to nitpick, but I made that point 5 posts ago.

I thought I'd compare the Nikkei fund to the equivalent SBI EXE-i fund, which is also a wrapper for US ETFs. Between October 2014 and now the EXE-i fund came out on top

Interesting, is that EXE-i つみたて先進国株式ファンド from the first page of this thread?

[jcc]

So the rakuten-vt deal could be pretty bad because even though vt is only 50% us stocks, the whole setup gets taxed by the US: a strong argument for avoiding any fund that wraps a US-domiciled asset.

What this all boils down to is that... we still need more information but the rakuten-vanguard wrapper funds seem like a bad idea compared to domestic, so if you do go for fund over vt etf, choose local

The Rakuten VT fund is still a bit new so I thought I'd compare the Nikkei fund to the equivalent SBI EXE-i fund, which is also a wrapper for US ETFs. Between October 2014 and now the EXE-i fund came out on top, despite having a higher expense ratio. Unfortunately, the funds track a slightly different benchmark, so it's a little difficult to say where the difference lies. It could be that the underlying ETFs are managed more efficiently.

Comparing what and what now? Nikkei is the japanese index. Do you mean the nissei fund against the exe-i? As in:

http://www.morningstar.co.jp/FundData/S ... 2013121001
and
http://www.morningstar.co.jp/FundData/S ... 2013051301

It looks like on the cost page that the actual running cost for the exe-i came out cheaper while nissei overran theirs a bit.

Examining the returns by quarter they win some lose some so as you said it seems it's mostly due to the differences of how they're constructed...

[jcc]

Some more reading material for those that are keen on minimizing costs(or just curious):

This discussion could probably go in a new thread?

Both are in japanese but I'll try and summarize the first(which just feels like a better overview):

Discussion of foreign ETFs vs low-cost domestic funds: http://shintaro-money.com/kaigai-etf-relay/

This seems to be a much more complete and accurate treatment of taxation than the other article. In particular of interest is the three layered taxation on VT or similar US-domiciled ETF's: first, the dividends inside the etf are taxed by the local country(except the US). Then the dividends put out of the ETF are taxed by the US. Finally, japan takes its cut of 20%. In practice with the US compromising ~half of vt, and not taxing both sides of the domestic stuff, that amounts to ~14.5% before japanese tax(so that is taken whether in nisa or not). Of that, you can apply for a tax rebate up to 10%, but apparently you're not guarrenteed to get it all. The article works with getting back 5%. So effectively the taxes you pay on the dividends outside nisa are 9.5% then 20.5% or inside nisa, 9.5%.

Against that you're dealing with an index fund, which has higher costs(~.28% real costs for tawara vs .1% for VT), gets taxed once inside(for each stock in the country of origin) and once outside(for japan). You can't get any rebate on the stuff inside so it's going to be ~10% off dividends. The remainder goes back into the fund and is counted towards capital gains taxed at ~20%(or 0 for nisa), so it's still getting double taxed, but it compounds on only the first(foreign dividends) tax.

What does that all mean? The take-home is that without nisa you're looking at more or less equal outcomes(ignoring trading/exchange costs on the etf) on one-year if you get that 5% tax rebate. In a NISA account you get slightly better returns on the ETF.

This treatment however doesn't cover reinvesting the dividends and compounding over the long term. It would be an interesting exercise to check for a rainy day.

Either way: The short-term difference between straight up investing in VT or investing in a quality low-cost domestic world index seems to be pretty small. So long as you get that tax rebate. Inside a nisa I suspect that though the VT does better in the short term, because the fund "expands" your tax-free slot that a low cost fund would do better.

This particular blog really digs into the differences and also discusses the issues of domestic funds that hold etf's:

http://tawaraotoko.blog.fc2.com/blog-entry-652.html

It's worth noting that although on paper exe-i has lower costs than say tawara and nissei, that exe-i is holding etfs and in turn getting that triple-tax whammy so it is questionable whether they can outperform the funds that hold stocks and on paper have higher management costs.

What is interesting to me is how deceiving those base cost numbers can be. In the end of the day the visible costs will go(lowest to highest) foreign etf < etf-backed fund << pure fund while the hidden tax costs will go the opposite direction. What actually wins out in practice is a complex function of length of holding, the proportion of dividends to capital gains, and how much you actually get back on your foreign dividends tax return.


edit: I updated the spread-sheet I made to take in this new info: https://docs.google.com/spreadsheets/d/ ... sp=sharing

It's a work in progress but I think it's accurate. I'm changing the comparison from VT vs VT-rakuten because I think rakuten-vt will always lose to VT: despite being an etf-backed fund, it costs the same as a pure funds while eating most of the tax issues of the ETF. I'm going to use the 0.28% costs of the "pure fund" tawara from the shintaro article.

The spread sheet is for taxable accounts only! If I get some more spare time I'll try to do the same thing for nisa. At this time using the figures from shintaro's blog and assuming a 5% foreign dividend tax rebate on the VT, the results are absurdly close(less than 1% after 20 years). Interestingly enough the advantage grows to a .72% peak at 23 years and then it starts shrinking as the power of the lower taxed dividends compounding has the fund catching up, with the gap down to .1% after 40 years. Without the foreign tax rebate it's a straight loss for vt