The Best Equity ETFs for a Passive Portfolio

Update: We have changed the recommended UCITS for Developed Markets from SWDA LN to IWDA LN. The two tickers are for the same fund except that IWDA LN is quoted in USD and is much more liquid, trading US$25 million per day vs.US$4.8 million for SWDA. All other parameters, such as TER and total cost of ownership, are the same for the two UCITS.

The Bottom Line

We compared more than 50 Equity ETFs listed in US, London and Hong Kong to identify the best options for a passive portfolio.

Our choices were primarily based on the 15-year total cost of ownership of the ETFs and their liquidity, although we considered many other factors too.

Irish UCITS are a lot cheaper to own because of better tax treatment and they have sufficient liquidity for most retail passive portfolios in our view.

If you absolutely need the better liquidity, we also recommend a US ETF in each case.

However, the risk of a very high estate tax on US ETFs is hard to estimate and each investor must make that decision for themselves.

We will be adding recommendations for more geographies gradually but the current recommendations should cover a majority of any passive portfolio.

The Research

Who this is for

If you want to invest in a globally diversified passive portfolio at a low cost but are confused by the large number of ETFs listed on various exchanges, our recommendations are for you.

If you are not sure about how to weigh the trade-offs between UCITS and US listed ETFs, read on.

Our research was largely focused on people living in Singapore but most of the analysis should be relevant for people in other locations as well.

Why you should trust us

We spent 10s of hours researching the differences between ETFs listed on different venues, primarily in US and London, but also in Hong Kong & Singapore.

We looked through the details on 100s of ETF, before shortlisting more than 50, and came up with the most comprehensive system of comparison to definitively answer the question of which ETFs work best to create a globally diversified portfolio.

What are ETFs?

Exchange Traded Funds (ETFs) are like mutual funds except that they are listed and trade on stock exchanges, like single stocks.

Just like mutual funds, ETFs also invest in many stocks or other securities and the performance of the ETF (or the mutual fund) reflect the performance of all the underlying securities in the fund.

In our analysis here, we are looking only at passive ETFs. These are ETFs that track a specific index, like the S&P 500 or Straits Times Index, meaning they should move in line with this index.

What are UCITS compliant ETFs?

UCITS are mutual funds that follow regulatory standards set by the European Commission.

For the purpose of this article, when we refer to UCITS we really mean UCITS that are domiciled in Ireland (and usually listed in London).

This is because US and Ireland have a tax treaty which gives the Irish UCITS a special tax rate on dividends paid to them by US companies. They need to pay only a 15% tax on these dividends while funds from other countries pay 30%.

There is no difference on the tax treatment of dividends received by Irish UCITS from companies based in countries other than US.

UCITS vs. US ETFs

The choice of Irish UCITS vs. US ETFs has significant impact on the risks and returns on your investments.

There are at least 7 areas of difference viz. Tax on dividends, risk of estate taxes, liquidity,  reinvestment of dividends, trading costs, Total Expense Ratios (TER) and Tracking Difference.

We introduce the first four factors here and the remaining are discussed in the next section.

Tax on Dividend There are two layers of dividend taxes applicable for investors an ETF. Both are usually known as Dividend Withholding Tax (WHT).

First is when a company pays a dividend to the ETF. Many countries levy a withholding tax at this point e.g. China levies a 10% tax on dividends of Chinese companies and Germany levies 26.375% on German companies. Both US ETFs and Irish UCITS are affected by this tax.

US does not charge any tax on dividends of US companies IF the dividends are being paid to funds (including ETFs) based in US. If the dividends are being paid to funds outside US, there is a 30% tax. Ireland has a special treaty with US, which reduces this tax to 15%. This is why Irish UCITS are very popular.

The second layer of tax comes when the investor (you!) receives a dividend from the ETF.

Investors in US listed ETFs must pay 30% withholding tax, no matter where they are based. This means you pay a 30% tax on dividends that came from US based companies.

But dividends paid by companies outside the US are taxed twice, first when they are paid by the company to the ETF and then when they are paid by the ETF to you.

So the effective withholding tax on a Chinese company is 37% (first 10% to Chinese Govt. and then 30% to US Govt.)  and on a German company is 48.5% (first 26.375% to German Govt. and then 30% to US Govt).

Investors in Irish UCITS do not pay this second layer. So there is only a 15% tax on US dividends, 10% on Chinese dividends and 26.375% on German.

In each case, the Irish UCITS pays a lower tax.

And for a long term investor, you get this benefit every year, which can really add up over time.

For people based outside Singapore, your government may tax the dividends yet again in your hands. However this is unlikely to differ between US ETFs and Irish UCITS.

So the relative tax advantage of Irish UCITS over US ETFs should remain (this is not tax advice).

Estate Tax Risk Theoretically all US assets held by foreigners, above a US$60K threshold, are subject to an estate tax of up to 40%.

This means, if the value of your US based assets (including ETFs, Stocks, Bonds, Real Estate etc.) is more than US$60K, you must pay up to a 40% tax to the US government.

To be clear, that is not a 40% tax on your gains but a 40% tax on the total value of your portfolio.

40%. Of. Your. Portfolio. In US.

That’s a lot. Theoretically.

In reality (and this is not tax advice either!), it seems the authorities in US have no way to enforce this tax and for the most part do not enforce it.

Clearly, as the linked article points out, this can change any time. It is impossible for us to estimate the likelihood of this tax getting enforced in the future. There are arguments on both sides.

We recommend reading that article because it’s the most comprehensive explanation we have seen for the situation with the US estate taxes. And this is a very important point, that you must decide for yourself.

What is clear is that if you think there is a meaningful chance of this tax being enforced at some point, US listed instruments should be off limits to you. Every other factor pales in comparison.

If, however, you believe that the estate tax is unlikely to be enforced at any time in the future that is relevant to you, then the comparison with UCITS is worthwhile.

We do NOT incorporate any view on this in our recommendations.

Liquidity refers to how much an ETF trades every day. We looked at the average daily trading value (ADTV) of an ETF over the last 3 months to assess its liquidity.

US ETFs are much more liquid than Irish UCITS. For example the most liquid Emerging Market (EM) UCITS trades US$6 million a day while the most liquid EM ETF in US trades US$1.6 billion a day! The most liquid S&P500 UCITS trades US$47 million a day while the comparable US ETF trades US$34 billion a day.

Its not even close and this is the big problem with Irish UCITS. Many of them are so illiquid that even retail investors may not be able to trade as much as they need easily.

Reinvestment of Dividends US ETFs are required by law to pay out at least 90% of the dividends they receive from their portfolio companies. As a result, they usually pass on the full dividends.

UCITS do not have any such requirement. Some of them pay dividends while others simply reinvest them back in the fund. Often, there are 2 versions of the same UCITS – one that pays dividend and one that reinvests.

If you do not need the dividend income from your portfolio for your daily expenses, the reinvestment option can be more efficient. This is because if you receive the dividend, you need to reinvest it or it will earn close to zero in the bank. If you do reinvest, you must incur trading costs.

Investors who need the dividend income can either choose the US ETF or need to be sure they are choosing the correct version of the UCITS, which adds to the complexity of investing.

How we picked

According to Wikipedia, there were more than 7,600 ETFs listed across the world in 2020. While most of these are not relevant if you’re trying to create a low-cost, globally diversified portfolio, selecting the right ones can still be hard.

This is because often you have multiple options for a single type of exposure. For example, there are more than 15 ETFs that provide a broad-based exposure to China. There are 10s of ETFs tracking the S&P 500 in some form. How do you choose the best one?

We relied on 3 main factors to make our recommendations: 15-year total cost of ownership (TCO), Total AUM, and Liquidity.

We also preferred ETFs that track the most commonly used benchmark indices in the asset management world. In many cases these were the MSCI indices e.g. MSCI Japan for exposure to Japanese equities.

In some cases these were indices created by other providers like S&P (S&P 500) or FTSE (FTSE All World). Where possible we preferred broad-based indices e.g. MSCI India (109 stocks) over the more popular Nifty (50 stocks).

As discussed above, our recommendations do NOT take into account any risk of the US Estate Tax being applied to US ETFs.

Total AUM or Assets under management is the total amount that has been invested in the ETF by investors. This is important because smaller ETFs may not generate enough revenue to be viable for the issuer, and the issuer may eventually close the ETF and return the funds to investors.

Usually this will be a small inconvenience as you can simply reinvest the refunded money into another fund. There is a risk, though, that you need to stay out of the market for a few days while you wait for the refund and are able to reinvest.

To avoid this risk, we preferred ETF that had large AUMs, ideally at least US$1bn and where possible we eliminated ETFs with lower AUMs from our consideration.

Liquidity More liquid ETFs are preferable as they allow you to quickly buy or sell as much as you need to. Less liquid ETFs can require you to buy or sell over multiple hours or even days, depending on the size of your position.

All things equal, we preferred more liquid ETFs. Some of the ETFs we recommend are not very liquid. In those cases, we have also estimated the size of portfolio that ETF can support and we believe they are liquid enough to support most retail portfolios.

If your portfolio is larger than S$10mm, you should consider using other (or multiple) ETF, even if they are not otherwise the best.

We approached the supported portfolio size from two angles, entry and exit.

If you are using these ETFs for creating your core, passive portfolio, chances are you will buy each ETF in small amounts over a period of time, maybe monthly or quarterly, and each trade will be small relative to the total position size you will eventually have in that ETF.

If you invest S$1,000 each month in CSPX, you only need enough daily liquidity to ensure that you can  buy S$1,000 worth without impacting the price with your order. A daily traded value of just S$10K will be more than sufficient.

Since most of the ETFs we shortlisted had ADTVs of more than $1 million, we assumed they would support entry for most retail portfolios.

However after 10 years your total position in CSPX may be S$200K (assuming some appreciation). Now if you want to exit in one day without impacting the market, you need a daily traded value of at least S$2 million.

Since we are evaluating ETFs for a core, buy & hold, passive portfolio, it may be reasonable to assume that you won’t really need to exit in one day.

Also since these ETFs have broadly diversified exposures to large, mature economies, it is unlikely (but not impossible) that something changes so drastically that you need to close one or more of the positions in one day.

However, there can be other reasons (e.g. personal emergency) why you need to sell these positions in a hurry.

Balancing these trade-offs, we decided to evaluate exit liquidity based on the assumption that you should be able to close the position in at most 5 days.

In this case some small market impact may also be acceptable. We assumed that your sell order should not be more than 20% of the ADTV, over 5 days.

In calculating the supported portfolio size for an ETF, we also adjusted for the maximum exposure that a relatively passive portfolio might have.

For e.g. a high risk passive portfolio could have 100% equity exposure and simply use MSCI ACWI for all of it. So if the MSCI ACWI ETF trades $5 million a day, it can only support a $5 million portfolio ($5m * 5 days * 20%).

However a low risk portfolio would have only 50% equity exposure and would probably not have more than a 10% weight in Japan. In that case an MSCI Japan ETF that trades $5 million a day will support a $100 million portfolio size ($5m / 50% Equity / 10% Japan * 5 days * 20%).

We preferred UCITS and ETFs that could support at least a S$10 million portfolio, as much as possible. Only one of our recommended UCITS was slightly below this threshold – NDIA LN can only support a S$9 million portfolio.

15-year Total Cost of Ownership (TCO) Why 15-year TCO? There are a number of different costs associated with owning ETFs that trade in different venues. Some of these costs are one off while others are annual.

So comparing the costs over a single year will be incorrectly penalize a venue where the one off costs are higher but ongoing costs are lower.

Since we are looking for ETFs for a core, long term portfolio, we assessed total cost assuming that you hold the ETF for 15 years and then sell.

We preferred ETFs with the lower total cost.

We have assumed no capital gains tax, which is the case in Singapore. In other countries, the treatment may be different depending on various factors.

Unless your country has a specific treaty with the country where the ETF is listed, the treatment should be identical across all ETFs and should not change the recommendation.

 – All-in Trading Cost We used the all-in trading cost for each market on Interactive Brokers based on our analysis of brokers in Singapore. This includes the broking commission as well as the FX spread charged by IB on both, the buy and the sell transaction. This was 0.16% for a round trip trade in US ETFs, 0.78% for London listed UCITS and 0.4% for Hong Kong listed ETFs.

If you use another broker in Singapore, chances are you will pay an additional 0.60%-0.80% for converting your SGD to USD or GBP when buying and back to SGD when selling.

We found that the all-in trading cost isn’t that important for the 15-year total cost no matter which broker or trading venue you use.

One cost we did not include was the bid-ask spread for different ETFs. We found it difficult to get this information for many ETFs. However we think the impact of bid-ask spreads on the total cost should be small. This is because where the data was available, the spreads ranged from <0.01% to 0.2%.

Since this cost is incurred only twice over 15 years, it does not move the needle on our recommendations.

 – Total Expense Ratio (TER) is the total fees and costs charged to you by the company operating the ETF. This is charged every year and was included 15 times in the calculation of the 15-year total cost.

This is not strictly accurate since the management companies can, and do, change the TER for ETFs over time, but it is the best estimate we have for now.

 – Tracking Difference measures how much an ETF’s performance differs from its benchmark index. The difference may happen because of fees, difference in composition of the ETF and the benchmark index, and many other factors.

While tracking differences can be positive or negative, we have assumed that they are negative and included it as an annual cost in the total cost calculation.

This is a somewhat conservative assumption and may penalize some ETFs unfairly.

We do not think this has impacted our recommendations anywhere but it was an important factor in many cases.

 – Dividend Withholding Tax Impact We discussed earlier that Irish UCITS listed in London get a better tax treatment than US ETFs.

Since this tax benefit occurs every year, it is a very significant portion of the all in cost for an investor.

The exact amount of the difference varies by the ETF. ETFs that have a low dividend yield are less impacted by the US taxes. So this will not a huge factor for, say, Technology ETFs since they are unlikely to be paying a lot of dividends.

ETFs that have a large exposure to US stocks are less impacted than ETFs with no exposure to US. This is because the more the US exposure, the less double taxation on the US ETF – recall that the double taxation is only for dividends paid by non-US companies.

Overall this was the single largest cost element over 15 years for most ETFs.

In our calculations, we assumed zero withholding tax impact for Irish UCITS and an annual cost equal to 30% of the dividend yield for US ETFs.

This overstates the tax disadvantage of US ETFs that have a large exposure to US companies.

When comparing the Irish UCITS and US ETFs, the tax impact can be split into two parts.

First is that, on a like for like basis, an Irish ETF will have a lower dividend yield than a US ETF (assuming both ETFs own some US stocks). This is because the dividend paid to the ETF by the US company is not taxed for the US ETF and is taxed at 15% for the Irish UCITS.

Taking the example of S&P 500, with a hypothetical dividend yield of 2%, the Irish UCITS will only  receive 1.7% (85% of 2%) while the US ETF will receive the entire 2% from the underlying companies.

When the two ETF then distribute these dividends to you, the Irish UCITS does not withhold any tax while the US ETF withholds 30%. So you receive 1.7% with the Irish UCITS and 1.4% with the US ETF.

The true difference in tax cost for the two ETFs is 0.3% per year. However if we simply assume a 30% tax rate for the US ETF and zero for the Irish UCITS, the calculated impact will be 0.6%.

In the above example we could simply calculate the cost disadvantage of the US ETF by subtracting 1.4% from 1.7%. However many Irish UCITS do not pay out the dividend. Instead they reinvest it.

This is great for investors as it saves you the cost of reinvesting but makes it difficult to calculate the cost differential.

To account for this, we adjusted the tax impact on all ETFs with large US positions based on the dividend yield on S&P 500 and the amount of US exposure each ETF had (e.g. 60% for MSCI ACWI, 70% for MSCI World and 100% for S&P 500).

This should bring our estimate closer to reality but its worth keeping in mind that it is a somewhat rough estimate.

Data Availability for ETFs is not great, especially for Irish UCITS. We had to collect the data for Irish UCITS from multiple sources, which means that is it hard to be sure that data points for different ETFs are comparable.

For example, the sources almost never specified a time period for data points like dividend yield or tracking difference.

Was the dividend yield quoted the actual yield over the last 12 months or was it the projected yield for next 12 months? Was the tracking difference for last 1 year or for 3 years or 5 years?

In many cases, we do not know. Data on US ETFs was relatively better and we were able to source most of it from a single source and should be consistent across ETFs.

But still, we need to emphasize again that these TCO estimates are quite rough and we should accept the cost differential as a deciding factor only if it is a large difference.

The Best ETFs

We recommend one UCITS and one US ETF for each geography. If the liquidity for the UCITS is adequate for your portfolio, you should choose UCITS because total cost of ownership over 15 years is typically much lower for these.

This is especially true for groupings with no US exposure e.g. Europe, EM, China etc.. Here the withholding tax really hurts over the long term.

Global Equities

VWRL LN is the best dividend paying UCITS for Global exposure. VWRA and VWRL are identical except that VWRA reinvests dividends while VWRL distributes them.

Developed Market Equities

HMWO is the best dividend paying UCITS for Developed Markets. It trades US$1.8 million a day.

US Equities

VUSD is the best dividend paying UCITS for US Equities. It trades US$10 million a day.

Europe

IMEU is the best dividend paying UCITS for Europe. It trades US$2.7 million a day.

Emerging Markets

IEEM is the best dividend paying UCITS for Emerging Markets. It trades US$1.7 million a day.

Japan

IJPN is the best dividend paying UCITS for Japan. It trades US$1 million a day.

China

3188 HK is the best dividend paying, non-US ETF for China. It trades 19.7 million a day.

India

We did not find a good dividend paying UCITS for India. This is normally not a problem since MSCI India has a very low dividend yield. However we have seen multiple sources indicating that MSCI India had a distribution of nearly 7% in 2021. If accurate, this was probably a one off.

Complete Data

The complete data used in our analysis is available as a Google sheet.

Disclaimer: We have made every effort to ensure the accuracy of all data and analysis included above. However it is possible that some errors made it into our analysis anyway. The quality of data we had to work with was also not great. Before investing in any of the recommended ETF, do verify all the details. If you spot an error, please let us know and we will do our best to fix it.