Dividend withholding makes actual ER of Total International 0.32%?

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financeperchance
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Dividend withholding makes actual ER of Total International 0.32%?

Post by financeperchance » Tue Oct 16, 2018 9:55 pm

I have never seen this argument made as a reason to simply hold the Total US Market index instead of buying international, and I hope someone can show me where my analysis is wrong. (This analysis applies to tax-sheltered accounts in which you don't have the option of claiming a foreign tax credit.)

1.) The last 4 quarters of dividends of the total international (VXUS) ETF are $1.5426.

2.) Per Vanguard, multiply that by 0.07061 for foreign tax withholding of $0.109 a share.

3.) At today’s closing price of $51.45, this is 0.21%

4.) The expense ratio of VXUS is 0.11%.

5.) Therefore the total, actual expense ratio, when adding the tax withholding to the ER is 0.32%.

6.) By contrast, VTI has zero foreign tax withholding, and the expense ratio is only 0.04%.

So the total expense drag for international vs. just holding total US market is 0.28% per year.

I'm aware of all the arguments for diversifying into total world, but the 0.28% a year of added expense is a pretty big hurdle to overcome over time, right?

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JoMoney
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Re: Dividend withholding makes actual ER of Total International 0.32%?

Post by JoMoney » Wed Oct 17, 2018 12:01 am

I've frequently made that argument.
One of the retorts, is if you hold international in a taxable account, you can claim a credit for much of the foreign withholding on your income taxes.

Here's a chart comparing MSCI ACWI Ex USA 'Net Return' vs 'Gross Return' indexes. The GR is before the estimated withholding. the NR is the benchmark a fund held in the US would track because of the withholding.
Last edited by JoMoney on Wed Oct 17, 2018 12:09 am, edited 2 times in total.
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triceratop
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Re: Dividend withholding makes actual ER of Total International 0.32%?

Post by triceratop » Wed Oct 17, 2018 12:05 am

JoMoney wrote:
Wed Oct 17, 2018 12:01 am
I've frequently made that argument.
One of the retorts, is if you hold international in a taxable account, you can claim a credit for much of the foreign withholding on your income taxes.
I think if you're going to make this retort (not saying you are, but the people making the retort to you), you have to then be also honest about the lower percentage of qualified dividends and the typically higher dividend yield. Overall I suspect the expense/tax cost of owning international stocks is much higher.
"To play the stock market is to play musical chairs under the chord progression of a bid-ask spread."

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JoMoney
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Re: Dividend withholding makes actual ER of Total International 0.32%?

Post by JoMoney » Wed Oct 17, 2018 12:20 am

We could also mention the fees charged by foreign custodian banks to hold the stocks for your benefit (since you can't actually own them)
, vote on the shares, make the dividend transfers and paperwork, etc... but that is likely a minimal cost in aggregate probably less than a basis point.

Also the potential slippage and types of front-running and late-trading of the funds in the US because the foreign exchanges are closed at the times the US funds are traded.

Higher market spreads.
Foreign exchange fees on currency transfers.

On the plus side, securities lending income is likely higher.
"To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks." - Benjamin Graham

fennewaldaj
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Re: Dividend withholding makes actual ER of Total International 0.32%?

Post by fennewaldaj » Wed Oct 17, 2018 12:24 am

To me this is one of the reasonable arguments for holding less than market weight of international stocks. 0.32% is still pretty low though so I would consider it a poor argument for holding no international stock. For me this is still in the acceptable expense range and I elect to hold marketlike weigh of international.

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Re: Dividend withholding makes actual ER of Total International 0.32%?

Post by pokebowl » Wed Oct 17, 2018 2:44 am

Results will vary by an investor's own tax situation. If you have enough space to hold all of your International in taxable or tax-advantaged, and are deciding between whether to put TSM or TISM in taxable, the tax differences between these two choices in recent years has been very small, and can be positive or negative going both directions. Efficiency of TISM would also increase if your state has its own FTC on top of Federal. :beer
There is nothing more expensive than something offered for free.

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galeno
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Re: Dividend withholding makes actual ER of Total International 0.32%?

Post by galeno » Wed Oct 17, 2018 1:51 pm

USA persons pay dividend taxes on non-USA equities. Last time I looked it was 7.5% for developed non-USA and 10.6% for EM equities.
AA = 40/55/5. Expected CAGR = 3.8%. GSD (5y) = 6.2%. USD inflation (10 y) = 1.8%. AWR = 4.0%. TER = 0.4%. Port Yield = 2.82%. Term = 33 yr. FI Duration = 6.0 yr. Portfolio survival probability = 95%.

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Re: Dividend withholding makes actual ER of Total International 0.32%?

Post by grabiner » Thu Oct 18, 2018 10:23 pm

JoMoney wrote:
Wed Oct 17, 2018 12:01 am
I've frequently made that argument.
One of the retorts, is if you hold international in a taxable account, you can claim a credit for much of the foreign withholding on your income taxes.
However, with international having a higher yield and fewer qualified dividends, the tax cost is about the same even after the foreign tax credit. Therefore, even in a taxable account, foreign stocks are more expensive.
Wiki David Grabiner

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