There are two things that eat into an investor’s returns over the long run and a smart investor should strive to minimise:
Most ETFs suggested on this forum are incredibly low TER (0.04%-0.15%) so there isn’t much room for improvement there.
However, taxes in Switzerland bode an interesting discussion on how to pick a tax efficient portfolio.
From my understanding in most cases there is no capital gains tax on an ETF and dividends are ultimately taxed as gross income.
For this reason it seems to me that a tax efficient investor would want to pick funds with lower dividend payouts, therefore, higher capital gains in the long run.
In general, it seems that US stocks pay out lower dividends than their developed world counterparts. Looking at VT vs VTI dividend payouts for 2018 I see that:
- VT $1.66 dividends at EOY value of $65.46 = 2.54% dividend payout
- VTI $2.60 dividends at EOY value of $127.63 = 2.04% dividend payout
If we assume that both funds appreciate at the same rate per annum (so 7% total with 4.5% appreciation and 2.5% dividends VT and 5% appreciation 2% dividends with VTI) and the only taxed proportion is these dividends then VT would have an extra 0.5% of its returns taxed. Assume 25% marginal tax rate then this would be 0.125% extra expense added to long run returns vs investing in VTI.
Of course, VTI also has 0.06% lower fees than VT so is more favourable there as well.
Note, there would also be wealth tax applied on the above but this would be fairly similar on both performances in this discussion.
Interested to hear any thoughts on the above.
P.S. Does anyone know how dividends are taxed in an accumulating fund such as CSPX?