Rakuten VTI Fund or Vanguard Total Market ETF in Monex NISA account?

[ChapInTokyo]

I'm wondering whether it will be better to get Rakuten VTI Fund or the underlying Vanguard Total Market ETF in my NISA account at Monex.

Because VTI is one of the ETFs that Monex allows you to buy for zero commission, and there's also an automatic dividend re-investment option, I'm wondering whether it might not be better to buy the ETF rather than the fund. Any thoughts?

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Choice 1: Rakuten VTI Fund: ER: 0.162% (for every 1,000,000 yen invested, Rakuten takes 1620 yen a year)
Choice 2: Vanguard Total Market ETF (VTI) ER: 0.03% (for every 1,000,000 yen invested, Vanguard takes 300 yen a year)
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*Monex has a currency exchange rate of 0 yen when buying US stocks so I guess the only fees that the ETF has which the Fund doesn't are the sales commissions when you finally sell the ETFs, and the 0.1 yen to the dollar conversion fee that Sony Bank will charge when I buy yen with the sales proceeds in USD.

(from Monex site, translated by DeepL)
Regular U.S. stock purchase service (dividend reinvestment, monthly purchase)
(1) Set up in a tax-exempt account (NISA account)
This service (U.S. Equity Regular Purchase Service and Dividend Reinvestment Service) can be used for both taxable and tax-exempt (NISA account) accounts. If you purchase U.S. stocks and ETFs in a tax-exempt account, gains on sales and domestic dividends are exempt from tax.

NISA (small amount investment tax exemption program)

(2) Combination with the Unlimited U.S. ETF Purchase Program
We offer an unlimited U.S. ETF purchase program that provides a cash refund on all cash transaction fees (excluding tax) for eligible issues. The number of eligible issues is the largest in the industry* at 21 issues. This service can be used in combination with the program.

The “industry” refers to major online securities companies (SBI Securities, Rakuten Securities, and Monex, Inc.) that offer no or virtually no cash transaction fees for certain U.S. ETFs. As of March 21, 2024. As of March 21, 2024, according to Monex, Inc.

Unlimited U.S. ETF Buying Program

(3) Zero exchange commission when buying U.S. dollars (free of charge)
The exchange commission from yen to U.S. dollars (when buying) for U.S. stock transactions (*1) in the foreign stock trading account will be 0.00 (free of charge). The “Yen Settlement Service”, which allows you to trade U.S. stocks in yen, will also be 0.00 (no charge). These services can be used in combination.

(*1) The exchange commission from yen to U.S. dollars in other securities accounts varies depending on the product or service.
(*1) The exchange fee from yen to U.S. dollar in other securities accounts varies depending on each product and service. (Please note that the periodic review may result in a charge.)

Translated with DeepL.com (free version)
https://info.monex.co.jp/us-stock/reser ... guide.html

[adamu]

I think the ETF is not a good choice for the NISA for two reasons:

1. You will pay 10% US tax on the dividends (although I'm not sure how the Rakuten fund handles this, either)
2. Dividends cannot be reinvested without using additional NISA allowance.

You could also consider ｅＭＡＸＩＳ Ｓｌｉｍ 全米株式

[ChapInTokyo]

I think the ETF is not a good choice for the NISA for two reasons:

1. You will pay 10% US tax on the dividends (although I'm not sure how the Rakuten fund handles this, either)
2. Dividends cannot be reinvested without using additional NISA allowance.

You could also consider ｅＭＡＸＩＳ Ｓｌｉｍ 全米株式

Yes I thought about the need to keep a bit of headroom to allow for reinvestments. For VTI I think that dividends are paid out quarterly and on an investment of 1.2 or 2.4 million yen will be less than the price of one ETF share so I’d probably need to keep a space of around 200,000 yen or so below the NISA quota threshold I guess. Could be quite a bit of a drag… Maybe it’ll work better with VXUS Total International Stock ETF which is 1/4 the price of VTI and will only require maybe 50,000 yen worth of headroom left for dividend reinvesting…

As for the US withholding tax, according to this Shintaro blog the funds holding US assets also pay 10% withholding tax which in a NISA account won’t be eligible for foreign tax credits so on this front the fund and the ETF are the same I think.

Thanks for the heads up on the ｅＭＡＸＩＳ Ｓｌｉｍ 全米株式 too. I’ll have a look!

投資信託の分配金に対する外国税額控除[二重課税調整制度]を解説(2020年改正)。分配金有、無分配、どちらが得?
(English translation by DeepL) Foreign tax credit for mutual fund distributions [double taxation adjustment system] explained (2020 amendment). With distribution or without distribution - which is better?
https://shintaro-money.com/deduction-fo ... funds/#i-8

[adamu]

Yes I thought about the need to keep a bit of headroom to allow for reinvestments. For VTI I think that dividends are paid out quarterly and on an investment of 1.2 or 2.4 million yen will be less than the price of one ETF share so I’d probably need to keep a space of around 200,000 yen or so below the NISA quota threshold I guess. Could be quite a bit of a drag… Maybe it’ll work better with VXUS Total International Stock ETF which is 1/4 the price of VTI and will only require maybe 50,000 yen worth of headroom left for dividend reinvesting…

Another way to think about it is that by choosing to have dividends paid out and reinvesting them, you are choosing not to protect new money.

How much would that ¥200k earn if invested and compounded tax free over the years? More than the difference in management fee, I guess (but I've not run the numbers). That's what you're sacrificing for every dividend, assuming you are able to max out the allowance.

[Tsumitate Wrestler]

Choose the mutual fund. The spreads that a larger broker can get on USD/YEN are better than an individual investor can hope to get. It is all set and forget. No leaky NISA balloons! Keep those dividends in.

For taxable? Pretty much a tossup, but Japanese funds are easier.

Remember when you do go to SELL, the mutual funds will be a simpler process, lots more options. (Sell amount/sell dollar amount/monthly tsumitate SALE to generate cash flow etc etc)

[ChapInTokyo]

I think the ETF is not a good choice for the NISA for two reasons:

1. You will pay 10% US tax on the dividends (although I'm not sure how the Rakuten fund handles this, either)
2. Dividends cannot be reinvested without using additional NISA allowance.

You could also consider ｅＭＡＸＩＳ Ｓｌｉｍ 全米株式

This one's nice. The expense ratio is quite a bit lower than Rakuten VTI and the ability to buy up to the quota limit in NISA's growth section and still have distributions automatically reinvested probably outweighs the slight cost advantage that Vangard's Total Market ETF has over the eMAXIS Slim全米株式.

[ChapInTokyo]

Choose the mutual fund. The spreads that a larger broker can get on USD/YEN are better than an individual investor can hope to get. It is all set and forget. No leaky NISA balloons! Keep those dividends in.

For taxable? Pretty much a tossup, but Japanese funds are easier.

Remember when you do go to SELL, the mutual funds will be a simpler process, lots more options. (Sell amount/sell dollar amount/monthly tsumitate SALE to generate cash flow etc etc)

I've been comparing past performance of the VTI, VXUS, and VT ETFs against the Rakuten VTI, Rakuten VXUS and eMAXIS Slim All Country Mutual Funds over several different time periods. In some time periods the ETF performs better but in others the Mutual Funds perform better. So no conclusive winner there, but your point about the Mutual Funds having more options when it comes to the time to sell is a good one, especially since Monex currently still charges a fee for selling ETFs, and even Sony Bank charges a conversion fee of 0.04 yen to 0.15yen per dollar converted to yen.

In a taxable account though, I'd probably give the ETFs the edge, since there is no way to get a tax credit for the US withholding tax paid by a non distributing Mutual Fund. In my case I currently have most of my invested capital in dollars at Firstrade so it'd probably make sense to keep some of the taxable part of the portfolio at Firstrade since Monex' dividend re-investment option is not as painless as a proper DRIP.

Thanks for all the good advise though. I'm gradually forming a good picture of the best practice for investing in Japan!

[Tsumitate Wrestler]

In a taxable account though, I'd probably give the ETFs the edge, since there is no way to get a tax credit for the US withholding tax paid by a non distributing Mutual Fund.

I'm pretty certain most funds recovers those taxes internally. They changed the law in 2020 to prevent mutual funds from bring double taxed.

[ChapInTokyo]

In a taxable account though, I'd probably give the ETFs the edge, since there is no way to get a tax credit for the US withholding tax paid by a non distributing Mutual Fund.

I'm pretty certain most funds recovers those taxes internally. They changed the law in 2020 to prevent mutual funds from bring double taxed.

I read in Shintaro's blog that you can get tax credits on distributions from mutual funds, but NOT if they're no distribution type mutual funds.

(translated by DeepL)
The above is an explanation of the foreign tax credit for mutual funds that will be revised in 2020.
This amendment will eliminate the double taxation on dividends and interest in the country of investment and in Japan, but the foreign tax credit will only be applied to funds that pay distributions, and will remain the same for non-distribution type funds.
https://shintaro-money.com/deduction-fo ... funds/#i-8

[Tsumitate Wrestler]

In a taxable account though, I'd probably give the ETFs the edge, since there is no way to get a tax credit for the US withholding tax paid by a non distributing Mutual Fund.

I'm pretty certain most funds recovers those taxes internally. They changed the law in 2020 to prevent mutual funds from bring double taxed.

I read in Shintaro's blog that you can get tax credits on distributions from mutual funds, but NOT if they're no distribution type mutual funds.

(translated by DeepL)
The above is an explanation of the foreign tax credit for mutual funds that will be revised in 2020.
This amendment will eliminate the double taxation on dividends and interest in the country of investment and in Japan, but the foreign tax credit will only be applied to funds that pay distributions, and will remain the same for non-distribution type funds.
https://shintaro-money.com/deduction-fo ... funds/#i-8

Deep-L might be flailing you here.

It's not an issue for reinvesting funds. Here's an explanation from a us fund.

.

....automatic dividend reinvestment. The big difference here is that the money is not sent to Japan but is reinvested, so it is only taxed at 10% in the US. Therefore, double taxation in Japan will not occur .