MAXIS ETFs vs eMAXIS Slim mutual funds
Posted: Tue Mar 16, 2021 2:28 pm
Following from previous threads, MUFG launched two new Japan-based MAXIS ETFs in January last year: 2558 (S&P 500) & 2559 (MSCI All Country). These are ETF equivalents of their popular eMAXIS Slim S&P500 and All Country mutual funds. The basic difference, other than being ETF vs mutual, is the MAXIS ETFs are distributing funds: they pay dividends twice a year. The eMAXIS Slim mutuals are accumulating funds, reinvesting dividends from the underlying stocks internally without delay to grow the fund.
The Shintaro Money website has some excellent articles on the new MAXIS ETFs. In particular, it highlights how the ETFs benefit from new rules allowing them to use foreign tax credits to avoid double taxation (foreign + Japan) on dividends, which the mutual funds cannot. This benefit applies only when held in tokutei or normal taxable accounts, as there is no Japan dividend tax anyway within NISA or iDeco (not that you can buy the ETFs in iDeco). Moreover the ETFs have slightly lower quoted fees than the mutual funds, although Shintaro Money estimates the actual costs are marginally higher for the S&P500 ETF than the S&P500 mutual.
On the other hand, the mutual funds can reinvest dividends straight away, so growth investors' money spends less time out of the market. Moreover, even though the mutuals suffer from double taxation on dividends, with the mutuals the Japanese taxation is deferred until you sell. This delayed taxation means you in effect benefit from an interest-free loan from the tax office, as the money is invested in the meantime and you benefit from its growth.
Shintaro did a comparison of the performance of the ETFs vs the mutual funds over the first year: S&P500 and All Country. They found the mutuals had actually done better than the ETFs with dividends reinvested.
There were a couple of simplifications in their calculations for the ETFs that I noticed: 1. They actually allowed the ETFs to reinvest the dividends gross of Japanese tax, which won't occur in practice when held in taxable accounts; 2. They did not consider the lag between the dividend date and the pay date when the customers receive the dividends from the brokers. This is almost 40 days for the MAXIS ETFs. Both these things inflated their calculated performance for the ETFs.
So, I decided to re-calculate and see the effect by correcting these - results are the graphs below. The mutual funds outperformed the ETFs pretty consistently over the first one year and three months. For the year running to the end of January, the S&P500 mutual outperformed the ETF by 0.21%, and the All Country mutual beat the ETF by 0.29%. These numbers are higher than the 0.09% and 0.1%, respectively, calculated by Shintaro Money.
The spikes in the graphs are caused by the lags between the dividend date when the ETF prices drop, and the pay date when you receive the money and reinvest.
My analysis also ignores the fact that you really need a lot invested in the ETFs to receive sufficient dividends to be able to buy new units on the pay date. For example, the lowest dividend was about 24 yen (S&P500 ETF, July 2020), so you would need at least 4 million yen invested in that ETF to have been able to buy a new unit on the pay date. I don't think it is possible to buy fractional units of the ETFs - please correct me if I am wrong.
TLDR: eMAXIS Slim looks better than MAXIS ETF for long-term growth investors. Especially when investing via NISA and iDeco.
There may however be some tax advantages to buying the ETFs for income investors, i.e. people who will not reinvest the dividends. Will need to think about it more.
Disclaimer: Just a random amateur on the internet. Use your own brain when making investment decisions.
The Shintaro Money website has some excellent articles on the new MAXIS ETFs. In particular, it highlights how the ETFs benefit from new rules allowing them to use foreign tax credits to avoid double taxation (foreign + Japan) on dividends, which the mutual funds cannot. This benefit applies only when held in tokutei or normal taxable accounts, as there is no Japan dividend tax anyway within NISA or iDeco (not that you can buy the ETFs in iDeco). Moreover the ETFs have slightly lower quoted fees than the mutual funds, although Shintaro Money estimates the actual costs are marginally higher for the S&P500 ETF than the S&P500 mutual.
On the other hand, the mutual funds can reinvest dividends straight away, so growth investors' money spends less time out of the market. Moreover, even though the mutuals suffer from double taxation on dividends, with the mutuals the Japanese taxation is deferred until you sell. This delayed taxation means you in effect benefit from an interest-free loan from the tax office, as the money is invested in the meantime and you benefit from its growth.
Shintaro did a comparison of the performance of the ETFs vs the mutual funds over the first year: S&P500 and All Country. They found the mutuals had actually done better than the ETFs with dividends reinvested.
There were a couple of simplifications in their calculations for the ETFs that I noticed: 1. They actually allowed the ETFs to reinvest the dividends gross of Japanese tax, which won't occur in practice when held in taxable accounts; 2. They did not consider the lag between the dividend date and the pay date when the customers receive the dividends from the brokers. This is almost 40 days for the MAXIS ETFs. Both these things inflated their calculated performance for the ETFs.
So, I decided to re-calculate and see the effect by correcting these - results are the graphs below. The mutual funds outperformed the ETFs pretty consistently over the first one year and three months. For the year running to the end of January, the S&P500 mutual outperformed the ETF by 0.21%, and the All Country mutual beat the ETF by 0.29%. These numbers are higher than the 0.09% and 0.1%, respectively, calculated by Shintaro Money.
The spikes in the graphs are caused by the lags between the dividend date when the ETF prices drop, and the pay date when you receive the money and reinvest.
My analysis also ignores the fact that you really need a lot invested in the ETFs to receive sufficient dividends to be able to buy new units on the pay date. For example, the lowest dividend was about 24 yen (S&P500 ETF, July 2020), so you would need at least 4 million yen invested in that ETF to have been able to buy a new unit on the pay date. I don't think it is possible to buy fractional units of the ETFs - please correct me if I am wrong.
TLDR: eMAXIS Slim looks better than MAXIS ETF for long-term growth investors. Especially when investing via NISA and iDeco.
There may however be some tax advantages to buying the ETFs for income investors, i.e. people who will not reinvest the dividends. Will need to think about it more.
Disclaimer: Just a random amateur on the internet. Use your own brain when making investment decisions.
