Key Post ISEQ 20 Exchange Traded Fund FAQ

Discussion in 'Exchange Traded Funds (ETFs)' started by Brendan Burgess, 23 Apr 2005.

  1. Brendan Burgess

    Brendan Burgess Founder

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    37,071
    This is similar to a unit-linked fund which invests in the top 20 shares quoted on the Irish Stock Exchange

    Costs

    Annual management charge: .5% per year to include all costs
    Raised to .75% in April 2008 and now to a massive 1.9% from May 2009 - avoid this product

    Ordinary stock exchange commissions to buy and sell
    There is a small effective initial charge as there will be a spread for investors set by the market makers. ( currently between 2 and 5 cents on a unit value of €12)
    ETFs must be held in a nomiee account or in a Crest account, so there will be charges associated with this also.

    No stamp duty on purchase and sale. (There is stamp duty on the creation of the ETF in the first place, but most buying and selling will be in the secondary market i.e. “second-hand” ETFs.)

    A well diversified investment
    Good diversification Biggest shareholding is AIB which accounts for 20% of the fund. It should comprise 21% of the fund by value, but no share is allowed comprise more than 20% of the fund.

    However, 55% of your investment will be in financial services between AIB,Bank of Ireland, Anglo and permanent tsb.

    Possible small disadvantage: There may be a discount to the net asset value

    Investors should note that the market price of a share in the ETF will not necessarily equal the net asset value per share. (From the NCB FAQ)
    However, in the US the discount to net asset value is rarely more than 1%. If it were to exceed 1%, then the ETF could be wound up for the underlying assets.

    Tax Treatment
    Dividends will be subject to 20% tax compared to a top rate of 47%(including prsi) on dividends from directly held shares for most investors.

    There is no further tax payable by a shareholder. The ETF is structured as a UCIT which is similar to a unit-linked fund, but has a slightly different tax treatment.

    Profits on disposal will be taxed at 23% instead of the 20% CGT which normally applies.

    No annual exemption as there is for CGT

    I presume that losses on an ETF cannot be written off against gains for CGT purposes.

    How to complete your tax return

    Can I hold my investment in share certificates?
    Investors who wish to deal in ETFs will need to have a nominee account or hold a Personal Membership Account in CREST

    This is a serious disadvantage for long term investors who prefer share certificates.

    It creates an element of risk which holding shares directly via share certificates does not have.

    There are usually some costs associated with nominee accounts and Crest accounts. There are no annual costs in holding shares directly.

    How safe is it?

    Very safe. The company holding the assets is the ISEQ ETF Plc. Theoretically, you have a right to ask them to exchange the ETF for underlying shares. The underlying shares are managed and safeguarded by Bank of Ireland Asset Management.


    I believe that recent court judgements in the Morroughs make holding Crest accounts more risky than holding share certificates.

    Is this suitable for short term investment?

    It will probably cost you around 1% to buy this ETF through your stock broker and a further 1% to sell them. So you would need to hold the shares long enough to overcome this 2% charge. This is fairly high compared to unit-linked funds with no initial or exit charges e.g. Quinn Life. So it costs 2% more initially to invest in an ETF, buy you save .5% a year. So an investment in Quinn Life would be better for the first 4 years. In practice, it would be better for only around 3 years, as the .5% quoted for the ETF is calculated slightly differently to the way unit-linked funds calculate their annual charges.

    Should I buy shares directly or through an ETF?


     
  2. Brendan Burgess

    Brendan Burgess Founder

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    Just to clarify the tax treatment

    UCITS which pay out their income as dividends withhold 20% Dividend Withholding Tax. This satisfies the full tax liability of the person. In other words, they are not obliged to pay any further tax on their dividends.

    This gives the ETF a considerable advantage over direct investment in shares where the dividends are subject to tax and prsi at up to 47%.

    There is a minor advantage over gross roll-up funds where the effective tax rate is 23%.

    Brendan
     
  3. Unregistered

    Unregistered Guest

    Re: >>ISEQ 20 Exchange Traded Fund FAQ

    How do you get a crest account in your name to hold these shares and how much does it cost
     
  4. Unregistered

    Unregistered Guest

    Re: >>ISEQ 20 Exchange Traded Fund FAQ

    Ignoring Stock broking charges for a moment .

    How is the annual management charge of 0.5% applied ?

    If i buy 100 ETF shares at 1€ today and sell them a year from now and the ETF share is still quoted at €1 - do i not get €100 before stockbroking charges.

    Is this 0.5% management charge not more like a bid offer spread i.e the real value of the shares = €99.50 but i paid €100 for them.

    Is it taken out of the dividends ?
     
  5. Brendan Burgess

    Brendan Burgess Founder

    Posts:
    37,071
    Re: >>ISEQ 20 Exchange Traded Fund FAQ

    You open an account with Crest when you buy shares through a stockbroker.

    The management charge is an annual management charge based on the total asset value of the fund. It is not an initial charge. It is calculated throughout the year and is reflected in the price of the unit. For example, if it is calculated each month, the unit price is reduced by one twelfth of .5% each month.

    There is no connection with the stockbroker charges.

    If you buy an ETF today for €12 and it rises by .5% over the next 12 monhts, then the price in 12 monhts time will still be €12 and this is what you will get before any charges imposed by your stockbroker.

    I don't think that there are any charges on dividends.

    Brendan
     
  6. Unregistered

    Unregistered Guest

    Re: >>ISEQ 20 Exchange Traded Fund FAQ

    Brendan

    thanks for your reply but does this not mean that the ETF fund over time will lose touch with the underlying shares ?

    If I buy today for 12 euro and the market rises by 0.5% per year for the next five years the ETF Share is still worth 12 euro in five years however the underlying shares should be worth 3% more ?

    how would this work in practice
     
  7. Unregistered

    Unregistered Guest

    Re: >>ISEQ 20 Exchange Traded Fund FAQ

    "It will probably cost you around 1% to buy this ETF through your stock broker and a further 1% to sell them. So you would need to hold the shares long enough to overcome this 2% charge. This is fairly high compared to unit-linked funds with no initial or exit charges e.g. Quinn Life. So it costs 2% more initially to invest in an ETF, buy you save .5% a year. So an investment in Quinn Life would be better for the first 4 years. In practice, it would be better for only around 3 years, as the .5% quoted for the ETF is calculated slightly differently to the way unit-linked funds calculate their annual charges.
    "

    Does this refer to a one-off lump sum payment ?

    If you were to save regularly say €1500 every three months in lump sum payments would the ETF Still win ?
     
  8. Unregistered

    Unregistered Guest

    Re: >>Stockbroker commissions

    On checking the broker commssion rates on these the rates are as follows:

    First €12,500 1.65%
    Next €12,500 1.25%
    Balance in excess on €25,000 0.75%

    There is also an annual fixed charge on the account.
     
  9. Unregistered

    Unregistered Guest

    Re: >>ISEQ 20 Exchange Traded Fund FAQ

    Thats what I thought, so coupled with the fact that you have an option to even further diversify with the EuroFreeway product it would seem that unless you had a large Lump sum to invest (i.e greater than 25,000) it would be better to stick with Quinn Life.

    Maybe the ETF could be a good spot for the SSIA money when it comes through as this is a relatively large lump sum
     
  10. Unregistered

    Unregistered Guest

    Re: >>ISEQ 20 Exchange Traded Fund FAQ

    The diversification point is a good one in relation to the funds like Quinn Life. Along those lines also, you can move between different markets like from Irish equities to US or European equities without having a disposal event. To do this with the ETF you would need to sell, triggering the tax event.

    The effect of the stockbroker fees upfront and on sale is that it limits you options in the short term 1-4 year timeframe. You are effectively loocked in because of sunk costs. This equally applies to large amounts.
     
  11. Brendan Burgess

    Brendan Burgess Founder

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    Re: >>ISEQ 20 Exchange Traded Fund FAQ

    They are charging you .5% for managing your fund. You are better off in the ETF than in the underlying shares, because of the more favourable tax treatment of dividends.

    A low cost unit linked fund with no entry charges is better again in the short term. The 1.65% seems high to me - it should be lower for online dealing.

    I think you are overstating the diversification issue. You should compare an investment in the ISEQ ETF with an investment in an ISEQ tracker fund. You can diversify your portfolio by investing part in the ETF and part in a Eurostoxx fund or in property or in whatever you want.

    Brendan
     
  12. Brendan Burgess

    Brendan Burgess Founder

    Posts:
    37,071
    Re: Key Post: ISEQ 20 Exchange Traded Fund FAQ

    I got my first dividend today from the ISEQ ETF

    It shows a Gross Dividend and a box for Income Tax, showing zero.

    So presumably they have taken the 20% off before paying me the dividend?

    I also presume that the ETF, as a gross fund, gets the Dividend Withholding Tax back?

    Brendan
     
  13. ClubMan

    ClubMan Frequent Poster

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    43,858
    Re: Key Post: ISEQ 20 Exchange Traded Fund FAQ

    Surely if DWT applied then it would be mentioned in case you needed this for tax purposes? From what I've read ISEQ 20 ETF dividends are subject to 20% tax only but if there is no mention of tax on the payment counterfoil then I wonder if you need to self declare/pay this?
     
  14. gonk

    gonk Guest

    Re: Key Post: ISEQ 20 Exchange Traded Fund FAQ

    I put the opposite interpretation on it. If the values for the gross and nett dividend are the same, and the box for Income Tax shows zero, surely that means no tax has been deducted and you remain liable to pay it yourself?

    On that subject, the Irish Stock Exchange's brochure on the ETF (http://www.ise.ie/getFile.asp?FC_ID=377&docID=377)
    says Irish taxpayers are only liable to pay 20% on the ETF's dividends. I have not been able to find any corroboration for this statement nor has my accountant. He is of the view that tax is payable on the dividend at one's marginal rate. Anyone know any different?
     
  15. Duke of Marmalade

    Duke of Marmalade Frequent Poster

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    2,246
    Re: Key Post: ISEQ 20 Exchange Traded Fund FAQ

    Boss, and others, Happy New Year:)

    This ISEQ ETF has me completely confused.

    My understanding of an ETF is that it is exchange traded i.e. prices are determined by supply and demand and there is instant liquidity, that's how Wikipedia describes the concept.

    The ISEQ ETF seems to be a variable capital UCITS with trading done at Net Asset Value as determined at the time in the future that the transaction is processed i.e. like a bog standard unit linked fund.

    So what are these quoted prices, what am I missing?

    The tax thing really confuses me. The Prospectus suggests that any annual distributions will be subject to 20% DWT and that's the end of the matter, any less frequent distributions are taxed at 23%.

    But, if as a result of a disposal, the punter triggers gains these are treated as income (a.t.t. Prospectus) does that mean 41%+ on capital gains? What about losses?
     
  16. Duke of Marmalade

    Duke of Marmalade Frequent Poster

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    2,246
    Re: Key Post: ISEQ 20 Exchange Traded Fund FAQ

    A bit more clarity on reading the Prospectus in more depth.

    The secondary market, i.e. exchange trading, is as described in Wikipedia but there is also a primary market operated like a normal unit fund, this I suppose acts to underpin the traded price.

    Tax is still a bit confusing though the Prospectus goes to great lengths to explain the treatment of "chargeable events" but as it is traded on CREST the Revenue has exempted it from the "chargeable events" regime and it is taxed as an "investment undertaking" but I'm not sure how that works.
     
  17. AJAM

    AJAM Registered User

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    27
    If you want to buy an Irish ETF, I suggest EIRL (by iShares).
    It's a US domiciled ETF that tracks the top 25 Irish listed shares. But it has lower fees (0.48% p/a) and as a US Domiciled fund it is subject to 33% CGT not the 41% that the ISEQ 20 ETF is subject to.
     
  18. Dardania

    Dardania Registered User

    Posts:
    28
    The WisdomTree ISEQ 20 isn't bad either for putting into a tax sheltered PRSA, with a TER of 0.49% - and it's domiciled in Ireland