How would we know if these really are ‘good’, or ‘best’ for us? What we should be looking for? This article will take you through some ways to compare some of the most popular ETFs out there.
First, set expectations. What outcomes do you wish to have?
Every investor has unique needs. For the purposes of this analysis, we’re assuming that you are:
- A long-term investor, your investment horizon is more than 10 years
- Looking for a ‘invest and forget’ approach. Expecting in-line market returns
- Primarily looking to grow your investments over building passive income stream
The ‘best’ ETFs in this case for you would mean that they’re reliable (tracks, replicates an index) and cost-effective for you to optimise returns in the long-run.
What to consider when choosing an ETF to buy and hold?
Compared to unit trusts, ETFs are much more cost-effective when it comes to management fees (a.k.a. expense ratios). But not every ETF expense ratio is created equal. Some funds, such as VOO can be as low as 0.03% per year, while others such as ARKK run up to 0.75%. The fee eats into your returns. If you’re investing for the long haul, fees could have been compounded into profits.
Dividend payout vs reinvesting
Some ETFs offer automatic dividend reinvestment. Meaning dividends received are invested back into the fund, allowing you to grow and compound your wealth. While some funds payout dividends in cash.
Fund domicile for tax efficiencies
In Singapore, we enjoy capital gains and dividend income tax-free. But not every country has this exception. Dividends paid out of ETFs listed on the US stock exchanges are subject to withholding taxes (WHT). While some Ireland-domiciled funds have no withholding tax.
What are cost and tax differences in VOO, SPY, CSPX and QQQ?
Each ETF would have its own pros and cons. You might have to bear slightly higher fees if you want to reinvest and take advantage of tax efficiencies. But if you’re happy with getting cash payouts with some withholding tax, a lower cost option could be better for you.
|Ticker||Expense Ratio||Payout or Reinvest?||Tax Implications||Exchange|
|VOO||0.03%||Payout||-30% WHT on dividends||NYSE|
|SPY||0.09%||Payout||-30% WHT on dividends||NYSE|
|QQQ||0.20%||Reinvest||-30% WHT on dividends||NASDAQ|
Another dimension is to take yield into consideration. When dividend yield is low, your withholding tax impact is limited. Assuming you invest $10,000 into each of these funds, the tax impact can range from $0 to almost $50 per year. Choosing a lower yielding fund for growth investing will help you to save long term.
|Ticker||% YTD Return||% Dividend Yield||Annual Yield (Estimated)||Withholding Tax Impact|
Other costs to consider when you DCA long-term
Besides fund-level fees, there are other costs involved in investing long-term to consider such as commission or platform fees each time you place a trade. If you plan to DCA monthly at $1,000 for a year. Here’s how much it would cost you for different options.
|Fund-level Fee (Expense)||Commission Fee (Syfe Trade)||Commission Fee (SG Brokers)||Management Fee (Syfe Custom)|
*SG Brokers are sampled from 3 lowest-cost brokers available in Singapore, updated as of publish date
Syfe Trade offers 2 free trades a month as part of its pricing plan. Some brokers may claim to be ‘commission free’ but there is a platform fee added per transaction. For CSPX’s case, the transaction cost is very expensive because it’s listed on the London Stock Exchange and might not be accessible for investors with smaller sums to invest.
Another option is Syfe Custom portfolios which allows you to mix and match the ETFs that you prefer. Pay management fees to offset your trades.
Currently both Syfe Trade and Wealth offer recurring buys and portfolio transfers with standing instructions from your bank. So you can DCA conveniently with no additional costs.
Choosing what’s best for you
Everyone’s long-term needs and preferences are different. So if you enjoy self-picking, make sure you consider your options holistically. If self picking isn’t your thing, Syfe has other solutions such as our managed portfolios that can help you get started getting the hang of investments you can check out too.
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