Vanguard ETF UK vs. US exchange

[asksm]

Vanguard has a small number of of ETFs listed on the London stock exchange. They have a much larger number listed in the US. The TER (Total Expense Ratio) of the US listed ETFs is typically much lower than those listed in London.

For example "FTSE emerging markets" ETF, LSE ticker VFEM, has TER=0.45%.
"FTSE emerging markets" ETF, NYSE ticker VWO, has TER=0.18%.

Both ETFs appear to be tracking the same FTSE index so the key difference is the cost. If your money is in euro you will incur a currency exchange cost to trade either in Sterling or US$ so why would you ever choose VFEM over VWO?

VFEM is domiciled in Dublin but I don't know what difference that makes to an individual investor in the ETF.

Even if your money is in Sterling and you incur maybe 0.5% currency exchange cost when you buy and when you sell you will only have to hold the fund for a few years before the 0.3% lower cost for VWO outweighs the currency conversion costs.

Does anyone have any views on this?

 

[SPC100]

I am not an expert on this. But I would like to be ;-)

Here are some of the things I have come across. I'm sure there are others.

Taxes inside the fund; One thing to bear in mind, is that the taxes that will be charged inside the fund, reduce the return of the fund. Different domiciles will have different taxation agreements that they can use. e.g. the fund buys 1000 shares in a company in Brazil. the shares declared a dividend of 100 USD. Depending on the taxation agreement between brazil and the place of domicile of the fund, the fund might suffer different witholding and other taxes on this dividend. So one fund might get back 90 or 100 USD another might get back just 50.

Tracking error: The TER does not cover tracking error, it can be positive or negative.

I am of the opinion that the effects of the above are sort of systematic and repeatable, and as such we can take history to give us some predictive power over them.

My suggestion of how to see the effect of all these is to take a unit value of both funds on the same day in the past (ideally a few years), take another unit value of both funds today, calculate the return for each fund, and see which gave the higher return.


investors tax: It seems that the taxes due on ETF's are different for different ETFs. This could have a large effect on your personal effective return. As far as I can see, nobody knows the taxes due on individual etfs, people take a best guess and leave it at that for the moment. People's best guesses differ.

Currency: From a euro investor point of view, you are converting to GBP or USD when you buy or sell. I assume a similar exchange cost to/from Euro and GBP/USD. For a long term investor these two transactions will not have a very large effect. If you can use a specialised third party service to do your currency conversion you will save some money.

Hedging: Beware - read the prospectus. Sometimes funds hedge against currency movements. You may or may not want that. I think funds are more likely to hedge currency, when the fund is a priced in a different currency to the area the fund invests in. Comparing the returns of funds when one hedges and the others doesn't will not IMO give you any meaningful results.

My own view, is that I don't want currency hedging, it is a cost. I embrace the volatility, along with rebalancing, and hope it give a better correlation for my portfolio. I also acknowledge that most internationals already deal in a lot of currencies in their own bushinesses. I also invest in such a way that I am happy with the top level currency risk. (i.e. a significant amount invested in Euro based companies)

Loaning securities: Beware - some passive funds will loan out their securities with an aim of making more money for the fund. This increases risk, but also increases return. You should check the prospectus. Comparing two funds tracking the same index where one loans and the other doesn't will not give any meaningful results.