Investing in ETFs with lower dividend payouts for tax efficiency


#1

There are two things that eat into an investor’s returns over the long run and a smart investor should strive to minimise:

  • Fees
  • Taxes

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?


#2

I believe it’s simply because the valuations of US stocks are currently higher than the rest of the world. Should the stock prices fall but dividends remain fixed (in cash terms), the percentage yield would automatically become higher and roughly in line with the rest of the world.


#3

I believe it doesn’t make sense to select ETFs based on dividend yield. If you do ETF investing the goal usually is to buy the whole market/segment etc. If you really want to optimize dividends than start investing in stocks directly with low or no dividend payment. In the S&P 500 alone there are a lot of great companies without dividends. https://www.dividend.com/investor-resources/sp-500-companies-that-dont-pay-dividends/

Yes they are taxed, worst case even for capital gains. Has been discussed here before several times. And when we are talking about tax optimization than CSPX (IE-based) is a bad idea you will lose 15% dividends due to tax leakage, better invest in a US based ETF when holding US stocks


#4

Theoretically a company can redistribute profits either through share repurchases or by distributing dividends. A company would pick whatever is most tax efficient distribution to their shareholders.

You are right that you lose some diversification by doing this but I still think it is an important consideration and analysis to make when picking a portfolio/ETF. If there are similarly diversified options with lower dividend payout it seems to make sense to prefer that.

Investing in individual stocks likely has a much higher fee burden as well as time burden than just picking an ETF or two but it would be interesting to run some analysis there. These would be incredibly tax efficient for Swiss returns costing only broker fees + wealth tax.

When you say CSPX is worse case for capital gains do you mean that for tax purposes they assume all capital gains are dividends so tax you on the full appreciation? That would make it well worth avoiding! And IE based is another good point to remember. Thanks!


#5

If the fund does not provide a report on the dividend amount then the tax authority will assume all capital gains are dividend amounts and will tax it fully. But most funds provide those reports. But you should be able to find threads in this forum with more info regarding this.


#6

Then just buy Berkshire Hathaway - that way you practically own an index of great solid companies, a successful business, and pays no dividends. :wink:


#7

Just buy Berkshire Hathaway. It a fund with 0% TER and no dividends. Also, it performs better than VTI.


#8

:grinning:
you beat me by less than a minute… at least you confirmed my view of BRK


#9

Haha cheers to the exact same thought at exact same time :beers:


#10

You can also buy growth fund
https://www.msci.com/documents/10199/a20000f5-7518-404d-9d37-2fd47939ed28


#11

While we are at this, is buying Berhshire Hathaway at SIX (BRK/B:SW) instead of BRK.A:NYSE counted towards $60,000 limit for non-US residents?

(I am aware that for Swiss residents the limit of 60k is not there, but if you retire outside of Switzerland, suddenly you might need to start taking it into consideration)


#12

Bad news for you: The US estate tax also applies to Swiss residents

I believe it doesn’t matter at which exchange you buy the Stock. If it’s an US security it will fall under the 60k limit in case of an inheritance.

Non American (AD/ADR) companies that are traded at a US Stock Exchange such as Alibaba on the other hand should not fall under the 60k Limit. But the IRS is deciding on an individuel basis, so if they feel like screwing you it might still get taxed:


#13

I thought the limit is increased to ~5M for Swiss residents.

What is your long-term plan for “tax efficiency”, assuming that you plan on retiring in the country without the US estate tax treaty?

Am I right that at retirement:

  • Your holdings will be hugely in VT/VTI/etc. so US situated assets
  • You cannot suddenly sell all of it when retiring and buy IE based funds not to become professional investor
  • Suddenly you might be taxed 30% on dividends and get under the US estate tax limit right after moving to another country
  • And as you are older, your chances of unfortunate death are increasing

#14

I was under that impression also. We discussed this a while back here: Some help with fund choice and fund currencies

tl, dr: Upon death you are treated as a US citizen. For US citizens the first 5M of your portfolio are exempt from the estate tax. The only concern swiss investors should have is if that treaty gets “revoked”


#15

Just red the discussion I guess you are right. I just remembered that a while back the banks were calling are their customers with 60k+ regarding the tax. Article here: https://www.ktipp.ch/artikel/d/usa-verlangt-neu-steuern-von-schweizer-erben/

But my understanding from the discussion here is that its only 5Mio total (including swiss real estate etc.) and after 60k+ you have to go trough the US tax process.


#16

thats easily avoided - before you die simply press “Close All Positions” in the IB app :wink:


#17

The topic has also been widely discussed here: The $60'000 cap for US investments


#18

Why don’t u worry about that when you’re actually about to move out. Stock market’s open every business day. Great chance to revisit all positions, reset CGT cost basis while it’s still tax free and optimize for new country’s taxman

BS

60k is guaranteed in any case, 11M (previously 5M) is for the case if all your wealth is in the US, else it’s prorated - if you have significant non US holdings (real estate etc) exemption can be much smaller than you think.


#19

Because I have to deal with 2 tax systems already now, being a tax resident also in Poland. So thinking about it as “moving out” for retirement is just an excuse in this case :wink:

Actually you are right. My mistake, you can sell a lot cause the only important condition is < 50% of your yearly income in capital gains. So it’s OK.

Thanks. Understood.


#20

Why? Double tax residency is only a temporary situation. Or are living half year here, half year there, every year?

Even if you violate that, it still doesn’t mean they will tax you on capital gains.

These conditions from Kreisschreiben specify the cases when they definitely won’t tax, nothing about the cases when they will.