DM94 wrote:AWOL wrote:So... the US withholding tax that reduces the returns on ETFs is annoying me. Sure I could replicate the index but that would work out more expensive so I've been wondering if Synthetic ETFs may be the way to go. Sadly they don't appear to give any additional benefit regarding dividend tax however they do have a decent performance record.
Has anyone researched this area or experience of it? With multiple counterparties these days the risks seem to be well managed so I am tempted by the idea of synthetic ETFs as a way to avoid withholding tax. I am mainly thinking about investments that will be outside a tax wrapper.
SPXD and i500.L have caught my eye and although I500 doesn't seem to be on HL it looks like it is on my main brokers platform.
I am also tempted by synthetic ETFs. They track the market/sector the same as a physical ETF but because they use swaps instead of holding shares, as far as I'm aware, there's no dividend withholding tax whatsoever (saving you taking that 15% haircut on your dividends). The obvious downside is that you don't own share certificates, so in the event of the 3rd parties who are involved with your ETF provider going bankrupt it has the potential to get messy.
From the SPXD factsheet
Investment objective : The Invesco S&P 500 UCITS ETF Dist aims to track the net total return performance of the S&P 500 Index.
That is reiterated in the footnotes
1 The index is S&P 500® Total Return (Net) Index.
A NR index is net of withholding taxes. Subject to which index data provider/index is agreed as the swap, that could be at the standard 30% US withholding rate, or the 15% reduced tax treaty rate, or 20% US dividend rate ... whatever. What it definitely isn't is the GR rate. GR or TR are total gross return, PR is just the price return.
If that were not the case then the counter-party would be losing out. Someone holds the actual shares and swaps their gains/losses with another party. There's no free-lunch, if there were then that would be quickly arbitraged out (near risk-free guaranteed gain).
I suspect the index used is spglobals, and something similar to this ...
https://www.spglobal.com/spdji/en/idsen ... d=92332686 ... but without the GBP hedging (in having its base/trading currency in US$ there's no need for any FX hedging) - that applies a 15% withholding tax rate.
So generally no different to if you held a full index (actual shares), assuming similar costs/fees, but with added counter-party risk on top.
Swaps are fundamentally a means for one party to offload exposure onto others for a while in a single package/block, rather than having to offload many different shares/holdings and then buy them back again later.
Some do try to avoid/lower taxation via lending. Vanguard US might incur a 20% dividend taxation on holdings, and by lending those shares to Vanguard UK see that reduced to 15%, so internally lend shares in exchange for a 5% of dividend 'fee'. Such share lending can result in higher gains than the benchmark net total return index that they track.