Share portfolio vs ETF tracker

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1

I have read people talking about buying GBP-denominated ETFs as a way of avoiding Trading 212’s GBP/USD currency conversion fee. For discussion: leaving aside other arguments about passive vs active investing, which do you think is more profitable of the below?

(a) A cheap Vanguard ETF like VUSA, with fee of 0.07% per annum, and no fx charges to pay because it is priced in GBP.

(b) A portfolio of US shares, incurring Trading 212’s 0.15% fx fee when bought and sold.

Suppose our portfolio in (b) obtains the same growth and dividend yield as the S&P 500.

I have calculated the comparison over many time scales and under different tax assumptions. Except in an ISA where there is no tax, option (b) is always better, even over a quite short buy-and-hold period of two years. This is mainly because of the loss of dividends to US withholding tax which is paid by Vanguard but which cannot be claimed as a foreign tax credit against UK dividend tax. Suppose S&P 500 yield is 1.25%. Imagine a UK investor pays 32.5% dividend tax and invests £10000.

(a) Costs are £18.75 (US withholding), £7 (Vanguard fee), £34.53 (UK tax) = £60.28 per year.

(b) Costs are £15 (Trading 212 fx fee on way in), £40.63 (US withholding and UK tax per annum), £18 (Trading 212 fx fee on way out, assuming total growth of 20%)

Costs over two years are
(a) 60.28 x 2 = £120.56
(b) 15 + 40.63 x 2 +18= £114.25

For longer buy-and-hold periods, higher ETF fees (many are 0.20% or more), or higher dividend yield the calculation moves even more in favour of (b) over (a). Even more if taking account of the compounding of savings in cost over time.

Even within an ISA, where there is no UK tax to pay, option (b) is better for a buy-and-hold period exceeding 4 years.

6 Likes
2

that’s a pretty big assumption, in the real world this would never happen and there will be a difference either way which will override any cost difference. But nice comparison and good analysis. cheers.

3

How did you factor in rebalancing your portfolio with option b?

4

I was not meaning to suggest that a portfolio of directly held US stocks should try to mimic the S&P 500, just that a buy-and-hold portfolio can cost less to run than a cheap ETF, even when having to pay the Trading 212 fx fee to first buy it, and then liquidate it some fine day. Most of my portfolio is never rebalanced. I have holdings of PG, MSFT, AAPL etc in my portfolio that have not been rebalanced for decades. The dividend yield on my US portfolio is about 2.6%, which is about 1% greater than the S&P 500.