VOO vs VUSA

He-Man

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Vanguard's S&P 500 index is available as VOO off the NYSE and VUSA off the Amsterdam exchange.

Both are based on US dollars but you buy VUSA in euros.

Both contain exactly the same stocks and use the same investment methodolgy.

Yet day in and day out, the gains and losses are out of sync with each other.

Today (14 August) [broken link removed]
but VUSA is only up by 0.9%.

Why the difference and is VUSA a bad investment given the fact that it's out of step with VOO?
 
Sorry Brendan, I don't follow. I want to understand why two ETFs run by the same reputable organization made up of the same stocks can be so out of step with one another. Is it explained by currency or time zone?
 
Good question and I'm just finishing a white paper on this very issue

There are two key factors that go into this difference

The first is easily understood and relates simply to a difference in charges

The US domiciled fund has a TER of 0.05% whereas the European fund has a charge of 0.09%pa

However, a more complex issue relates to Dividend Withholding Tax (DWT). European funds suffer up to 30% US tax, depending on where the fund is resident, which is withheld from dividends on US companies . This tax cannot be reclaimed by Irish investors in European funds and so is effectively a "hidden" cost that most investors are blissfully unaware of.

The effect of this DWT, assuming an overall dividend yield of say 2%pa could be as much as 0.60%pa.

On average, the effect of DWT is typically twice the impact of the TER for European funds and therefore this is a very significant factor for all Irish investors to address in their investment decisions.
 
Thanks Marc.
The DWT is unavoidable, though, isn't it?

My understanding is that even if a non-US-based investor were to buy VOO instead of VUSA, the DWT would apply. But you'd also then be subject to the US death tax.

At least when buying VUSA you avoid the US death tax. Correct?
 
As in all these matters the answer is "it depends"

You are right to highlight US estate taxes which apply to US situs investments. But there are some strategies we use to deal with this problem depending on circumstances

Equally,it is possible to negate the impact of DWT depending on the specific circumstances of the investor

That said this is probably the most complex investment question I have dealt with in the last 20 or so years
 
Both are based on US dollars but you buy VUSA in euros.

Both contain exactly the same stocks and use the same investment methodolgy.

Yet day in and day out, the gains and losses are out of sync with each other.

Marc is right when he mentions those differences but the overwhelming difference in returns will be the change in EURUSD. As you say, VUSA is bought in EUR while VOO is bought in USD. If you overlay a chart of VUSA, VOO and EURUSD, you'll note how VOO and VUSA diverge perfectly as the EUR strengthens or weakens with respect to the dollar. Hope that helps.
 
I see. But the currency used to buy the ETF is really only a wrapper, isn't it? I mean the true value is in the underlying stocks...so does it really matter whether one buys the S&P 500 with euros or dollars?
 
I see. But the currency used to buy the ETF is really only a wrapper, isn't it? I mean the true value is in the underlying stocks...so does it really matter whether one buys the S&P 500 with euros or dollars?

If you take the following example:

In Nov '09, 1 EUR buys $1.50. Let's say you buy 100 units of a EUR exchanged, USD based fund @ 1 EUR, and 100 units of a USD exchanged, USD based fund @ $1.50.

100 x 1 EUR = 100 EUR
100 x 1.50 USD = 150 USD

Let's say then over the next few years, the underlying shares double in value (assume no FX swings).

100 x 2 EUR = 200 EUR
100 x 3 USD = 300 USD = 200 EUR

Then, factor in a 20% decrease in the value of EUR against the USD. Your holdings in your home currency are worth:

100 x 2 EUR = 200 EUR
100 x 3 USD = 300 USD = 250 EUR

In the scenario where the exchange and the base currency are the same, you're 50 EUR better off. Of course, it can go the other way too and you could be 50 EUR down.

If you're buying a fund where the exchange and the base currency are different, you're also taking a punt on your home currency not strengthening to the point where the nominal gains are eroded.

Personally, I make a point to only buy the fund in the same currency as its base so that you're taking a once-off punt on an FX rate rather than a rolling exposure, i.e. you're tracking 1 thing rather than 2.

So, in answer to your question, your shares are worth the same, but your currency isn't.
 
Some heavyweight investment bodies in this thread, and full respect, as am only in ha'penny place, but there might be a few misconceptions i.e. there is no reason to expect that they would "match" when they are offered for sale in a bid/ask market, which is what I think the original question was...a little like asking why are more Hersheys sold in the US than Europe. However, if the question is why does the NAV fluctuate then that's a different kettle of fish.
 
@Rekhib,

Thanks for that! I finally understand. The main concern I have about buying in USD is the estate tax. Is this a legitimate concern for those with more than 60k dollars, or are there ways around it?
 
@Rekhib,

Thanks for that! I finally understand. The main concern I have about buying in USD is the estate tax. Is this a legitimate concern for those with more than 60k dollars, or are there ways around it?

I'm not too sure about the estate tax, Marc might have the answers on that one. Generally, because of the estate tax and the dividend withholding tax (even at the lower rate of 15%) mean you are generally best avoiding US based funds.

If you're buying something broad, you'll find the same product available in Europe and you'll avoid the whole US scene altogether. You should only need to buy US based funds if you can't find it anywhere else (or the spreads are too high in Europe).

For example, iShares' CSPX tracks the S&P 500 at 0.07% TER, there are no dividends to pay tax on (i.e. it's an accumulating fund), you can buy it in USD in London; it's a better option (if you don't want the income) than either VOO or VUSA and currency issues aside, it'll always beat both of them because it's a total return ETF.
 
It seems that CSPX when bought off London SE is denominated in GBP. However, it can be bought from the Swiss exchange in USD.
 
It seems that CSPX when bought off London SE is denominated in dollars. However, it can be bought from the Swiss exchange in USD.
Buying a USD fund in USD has no benefit for a EUR based investor. Your return is always (return of the fund)+ (return on the exchange rate). If you buy a USD denominated fund in e.g. the UK in GBP, your return is (return of the fund) + (change in exchange rate). The latter is (USD/ GBP and GBP/EUR), i.e GBP parts cancel out so the change in the exchange rate is the change in USD/EUR.
Buying a USD denominated fund in Switzerland for USD has no benefit if EUR is your base currency. Once you exchange EUR to buy USD to buy the fund or cash in your return in EUR you are exposed to exchange rate risk. So buying in USD has no benefit for an investor with EUR as his/her base currency. If you stick in USD you have no exchange rate risk, assuming you already had USD to buy the fund and that you keep your return in USD.
 
My situation is that I am paid (currently) in a dollar-pegged currency.

If I open an account with Interactive Brokers, I automatically get sub accounts in USD and EUR.

So, I'm thinking to buy an ETF like VEUR in euro (plus a European government bond ETF in euro), both of which will be traded in euros with a base currency as euro, bought from European exchanges.
I am also thinking to buy an ETF with US exposure (such as the aforementioned CSPX) from the Swiss exchange in USD, where the fund is actually traded on the Swiss exchange in USD.
Doing this would allow me to escape estate tax and minimize currency exposure by having multiple base currencies with my broker. Or am I mistaken?
 
I still don’t understand the difference in buying an ETF in EUR when its base currency is USD, or investing in the USD. I don’t know where I will retire and most of my wealth is EUR, will I lose more changing the EUR to USD and investing in USD or buying the etf in EUR and expecting a lower return over the next 30-40 years because of the swap contracts that the EUR ETF needs to buy?

The US domiciled fund has a TER of 0.05% whereas the European fund has a charge of 0.09%pa

So what’s the difference here, the Us fund should underperform by 0.04% pa because it’s not managed as well? Or overperform by 0.04% because the cost is integrated into the price?

As a resident of nowhere, am I still subject to both the DWT and “death” tax (which I don’t know much about), and would it be worth paying a tax adviser to look into how I can avoid these?
If you're buying a fund where the exchange and the base currency are different, you're also taking a punt on your home currency not strengthening to the point where the nominal gains are eroded.

I don’t understand this. So the EUR needs to strengthen against the USD to do just as well as the fund which has the same exchange and base currency? If the EUR and USD do not fluctuate at all, will the EUR held funds fare worse?
 
If you overlay a chart of VUSA, VOO and EURUSD, you'll note how VOO and VUSA diverge perfectly as the EUR strengthens or weakens with respect to the dollar. Hope that helps.

I've done a very small bit of research here taking usd per gbp from the xe.com site, vusa:ln from bloomberg (GBP based) and voo from google just by searching "voo chart".

For the first example I used the closing values on sep 10th 2013, and the current values today, sep 9th 2014. VOO gained 18.33%, VUSA gained 16.07% and the GBP gained 2.29% on the USD. Factoring in the GBP gain to the VUSA value, it gained 18.73%, a difference of 0.4% in a year.

For the second example I used the closing values on 12th August and current values today. VOO gained 3.17%, VUSA gained 3.7% and GBP dropped to 95.68% of its initial value against the USD. Factoring in currency, VUSA dropped to 99.22% of it's initial value, a difference of 3.99% in just a month.

Can anybody explain this to me? Apologies if I'm being simple or complicating matters.

Also, is there any one site to get all of the above information from easily, rather than 3 separate sources as I used above, and any other ETFs that track the same index so that I can do more research and try to understand this more clearly?
 
For the first example I used the closing values on sep 10th 2013, and the current values today, sep 9th 2014. VOO gained 18.33%, VUSA gained 16.07% and the GBP gained 2.29% on the USD. Factoring in the GBP gain to the VUSA value, it gained 18.73%, a difference of 0.4% in a year.

For the second example I used the closing values on 12th August and current values today. VOO gained 3.17%, VUSA gained 3.7% and GBP dropped to 95.68% of its initial value against the USD. Factoring in currency, VUSA dropped to 99.22% of it's initial value, a difference of 3.99% in just a month.

It's tricky enough pulling all the data together. You can use the Compare functionality on Google Finance or Bloomberg (limited to 3) or Morningstar have some great portfolio tools available.

VUSA:LN gained about 8.2% over the last month which would make sense given VOO's performance (+3.17%) and the fact that GBP has shed some of its value against the dollar (-3.89%). I can't imagine the differences would be 3.99% over such a short period. There will be small differences of course due to a wide variety of factors, e.g. replication basis (physical, swaps), TER, tracking error, trading volumes and the prices that are available via the tools above are generally the market prices, rather than NAVs so at any point in time, one fund could be trading at a premium, one could be trading at a discount. Plus, the publicly available information could be bid, ask, last trade etc. Hope that helps.

Buying a USD fund in USD has no benefit for a EUR based investor.

I would agree with that sentiment if it's traded on a US exchange, i.e. USD traded, USD base, US exchange but a USD traded, USD base, EU/UK exchange could have significant benefits, e.g. He-Man is paid in a dollar-peg currency. Plus, a vast majority of global market cap is not in EUR so even for domestic investors, it makes sense to have at least some currency diversification IMO.
 
Andrew Hallam has a slightly different take on this issue, or at least is not concerned by it. What is your opinion on [broken link removed], rekhib?
 
Yup, he's exactly right. In his example, he's saying if you converted your funds back to USD, you would be in the same position - true (and that's the same in the example I posted earlier, i.e. in either scenario, you have 300 USD). But, the point is it's not the same in EUR because of the FX swings. If you can buy a fund while your home currency is strong, your gains will be swelled, and vice versa, if your home currency is weak, you'll be playing catch-up. In his case, it really doesn't matter a huge amount whether you buy an ETF in USD or HKD because the HKD is pegged to the USD and is notoriously non-volatile (rightly so!). So, if he can avoid paying the 1% FX conversion fee charged by his broker by buying in HKD rather than USD, that's definitely a good move. There's no such security with the EUR (other than general monetary policy) so changes in the FX rate can greatly affect fund performance. Hope that helps.
 
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