New changes in FX conversion impact

[tofusoba14]

Hello,

I have went across several discussions of comparison of eMaxisS&P500 against buying VOO etf directly. Up until 2023 year end, I always found eMaxisS&P500 to be much efficient because of positive points like, don't need to convert JPY to USD, divident reinvestment so lower tax cut etc, ability to invest in small units etc.

However with few updates as below, seems buying VOO directly is cheaper for next year atleast. Updates are :

1. Exchange fee of USD/JPY is 3 sen (0.03 JPY) per usd.
2. VOO is brokerage free on Rakuten / SBI


So below calculation helps put this above point in perspective :

Assumptions :
Example Total yearly Investment = Full Nisa (3.6M JPY)


Case 1 : I keep buying eMaxisS&P500

Total Investment = 3,600,000 JPY
Expense ratio = 0.11 %
Expense I have to pay (For simplicity i assume 0% change in S&P) = 3,600,000 x 0.11% = 3960 JPY

Case 2 : I Buy VOO etf

Total Investment = 3,600,000 JPY
Expense Ratio = 0.03%
Expense I have to pay (For simplicity i assume 0% change in S&P) = 3,600,000 * 0.03% = 1080 JPY
USD conversion fee I have to pay = 25,300 USD * 0.03 = 759 JPY
Total expense = 1080 + 759 = 1839 JPY

That shows saving cost by half, which is significant if the investment amount is higher.


One risk i see is, this campaign by all brokers bring a bait, such that after few years, once most people have good USD accumulated, they may raise conversion and get the money back. Is that possible or is there a way around it in future ?


Would like to know everyone's thoughts.
Also let me know if i have made any mistake in calculation in any way.

[RetireJapan]

I think the reinvesting of dividends in a NISA account is important (which you are able to do internally without using up your contribution allowance with mutual funds), especially if you are planning to max it out.

My gut feeling is that would be worth the slightly higher fee...

Anyone else?

[adamu]

There's a good summary in Japanese here: https://shintaro-money.com/kaigai-etf-r ... FVTIVOOETF

If I've read it right, it seems to say that the US ETF outside of a NISA wins marginally if you claim the foreign tax deduction on your tax return, but since this is not possible in a NISA, the J-funds work out better.

Note this is specifically about S&P 500 which is US-only, global funds are a different story.

[sutebayashi]

I also think it’s better to stick with toshin for NISA, the internal reinvestment of dividends tax free being the primary reason.

Outside NISA, I think costs between Toshin and US ETFs are now fairly similar, so either or is just fine, but indeed doing a kakutei shinkoku to get the foreign tax deduction is needed in case of foreign ETFs.

Beyond that, direct comparisons seem nigh on impossible, as
1) for foreign ETFs, you have to make a faulty assumption about an equivalent time to convert between yen and dollars, but in practice you convert at a time of your choosing. Thereafter, the forex rate can easily move up or down enough to overwhelm any impact of the forex conversion cost (since forex costs have come down a lot)
2) when buying a Toshin, you have to have your order in a day before the trade price is decided, and you are at left to the whims of the market there, too.

It’s good news that costs have come down to the extent they have. One wonders how the asset management companies are able to make money with such low margins.

[adamu]

indeed doing a kakutei shinkoku to get the foreign tax deduction is needed in case of foreign ETFs.

This is actually a pro for the ETFs, because you still pay the US tax in a mutual fund, but you can't claim a deduction in that case.

I like the article because it runs the numbers, no need to postulate. It assumes zero exchange costs though, which is not accurate as you pointed out.

Again, only when talking about US-only investments.

[captainspoke]

...Again, only when talking about US-only investments.

My perspective is as a US investor may be skewing it, but don't many other countries around the world also have a tax-withholding on dividends? And even more than 10%?

(UK is one I know of that doesn't.)

[adamu]

...Again, only when talking about US-only investments.

My perspective is as a US investor may be skewing it, but don't many other countries around the world also have a tax-withholding on dividends? And even more than 10%?

(UK is one I know of that doesn't.)

Yes but this point has been covered a bazillion times and was also the motivation for the wiki: if buying a US fund with international stocks, you pay the US tax in addition to the local tax. And then Japanese tax after that.

I think the focus is on US ETFs because that is what is widely available in Japan.

[Tkydon]

My view is that it would be better to go with an Exchange Rate Hedged (ヘッジ有) Global Index Fund denominated in Yen at this time and lock in the Y14x rate to avoid the Exchange Rate Risk if, or rather when the world starts cutting Interest Rates...

https://www.youtube.com/watch?v=s0f-jNy0IW0
Ramin talks about this @17:30
Last 4 words @23:10...

[sutebayashi]

My view is that it would be better to go with an Exchange Rate Hedged (ヘッジ有) Global Index Fund denominated in Yen at this time and lock in the Y14x rate to avoid the Exchange Rate Risk if, or rather when the world starts cutting Interest Rates...

Haha, this could get things started again

I get that many people think the yen is going to strengthen relatively in 2024, and maybe it will. But then what about in 2025 - 2030, 2040, 2050 (or whenever your view of future forex rates flips)?

At least with NISA from next year, if one does sell, the allocation will be freed up for new investment again in a subsequent year. But I intend to use NISA for buy-and-hold products that compound forever, and keep my non-buy-and-hold plays in taxable accounts.

[sutebayashi]

This is actually a pro for the ETFs, because you still pay the US tax in a mutual fund, but you can't claim a deduction in that case.

Is it a pro - I thought it was kind of square, or even advantageous to mutual funds as there is no need to do the foreign tax deduction hassles for domestic mutual funds.

My understanding is for ETFs we pay US tax, but the foreign tax deduction of kakutei shinkoku has the effect of counting the US tax towards the higher 20.3% tax rate in Japan. For domestic mutual funds, doesn’t the equivalent get covered by 2020’s 二重課税調整?