How does the withholding dividend tax affect the cost of ETFs?

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Intelligent_Bar2283
Posts: 11
Joined: Sun Jan 08, 2023 1:00 am

How does the withholding dividend tax affect the cost of ETFs?

Post by Intelligent_Bar2283 »

Let’s say I live in a country that has a tax treaty agreement with the US, so I get to enjoy a withholding tax of 15%. According to trackingdifferences.com, Vanguard FTSE All-World UCITS ETF (Dis) has a tracking difference (TD) of -0.02% since 2012. Are the TD shown on the website after withholding tax deductions or before? If it’s before, doesn’t that mean the total cost of the fund is actually 0.19% because that’s what you get after multiplying the dividend yield with the withholding tax?

Calculation:
(1.39% x 15%)-0.02% =0.19% (total cost)

My guess is its before tax deductions because the ETF’s prospectus mentioned ‘gross income reinvested’ but I just wanted to be sure.
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JoMoney
Posts: 16260
Joined: Tue Jul 23, 2013 5:31 am

Re: How does the withholding dividend tax affect the cost of ETFs?

Post by JoMoney »

The benchmark index the fund tracks is an after (estimated) withholding taxes index. Usually the after-withholding tax indexes estimate higher than what funds actually wind up paying. You would need to compare the fund to it's gross-return index (before tax withholding) to get a more accurate view of the all-in difference including taxes.

Morningstar doesn't make it as easy to bring up different index returns anymore, but by example here's a $10k growth chart for the (US) iShares MSCI ACWI (All-Country World Index) ETF compared to the benchmark MSCI ACWI GR (Gross Return) index and the MSCI ACWI NR (Net Return - after withholding)

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"To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks." - Benjamin Graham
id_afstand
Posts: 205
Joined: Sun Nov 14, 2021 5:11 pm
Location: The Netherlands

Re: How does the withholding dividend tax affect the cost of ETFs?

Post by id_afstand »

I gave you an answer in another thread:

For this specific Irish etf: it is benchmarked against a net index, which substracts dividend withholding tax. The rates differ: the index assumes a 30% tax on US dividend, while the fund pays 15% due to US-Ireland tax treaty. Security lending gives it some 0.02% in income.

For this specific fund the total cost is around 0.55% of which 0.22% is the ER and some 0.30%-0.35% is the unrecoverable dividend withholding tax.
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