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May 11 2013

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Vanguard’s Exchange Traded Funds Headed for Hong Kong


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If you’re an investor based in Hong Kong or Singapore, your lowest cost options for a globally diversified portfolio are exchange-traded funds on the U.S. market. 

The U.S. is an international supermarket—a place where you can buy New Zealand, Australian, Canadian, Asian… virtually any stock index you could ever want.

Purchasing them, however, accompanies an exchange rate hit.  You won’t see it on a brokerage statement, but if you’re earning Hong Kong dollars, and you buy an ETF off the U.S. market, you’ll pay a currency spread of roughly 1 percent. 

This isn’t a big deal, of course.  It’s not like an ongoing expense ratio charge, like the barrage of fees associated with an insurance linked annuity, such as those flogged by Friends Provident, Zurich International or Generali, but it does further the cost (however minor) for each purchase.

A new option, however, is arriving in Hong Kong. 

Vanguard has received approval for their ETFs to trade on the Hong Kong exchange.  At this point, we don’t know which ETFs will be available.  But their acceptance (into the exchange) is a great sign.  Those living in Hong Kong may be able to purchase global ETFs without a currency hit.  Time will tell which ETFs will be introduced. 

And I’ll be watching closely.  If enough Hong Kong based investors buy them, Vanguard ETFs might find their way, eventually, to the Singapore exchange.

 As a Singapore-based expat, I’d be thrilled to see that.

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About the author

andrew hallam

I'm a freelance finance writer, lucky enough to have been nominated as a finalist for two Canadian National Publishing Awards. I'm also the author of Millionaire Teacher: The Nine Rules of Wealth You Should Have Learned in School, a book explaining how I became a millionaire on a teacher's salary, while still in my 30s. Working to empower people financially, I'm available to motivate and inspire people on basic retirement planning and index investing. I'm happy to comment on your questions, first, please read the Terms of Use.

Permanent link to this article: http://andrewhallam.com/2013/05/vanguards-exchanges-traded-funds-headed-for-hong-kong/

18 comments

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  1. avatar
    Kevin

    Would this then be better for a Singaporean to buy Vanguard ETFs off the HKSE instead of NYSE?

    1. avatar
      Andrew Hallam

      No it wouldn't Kevin. The same exchange rate hit will occur because you would be transferring Singapore dollars to Hong Kong dollars. But if Vanguard comes to Singapore, that's a different matter. You could then buy Vanguard ETFs with Singapore dollars. Let's hope they come!

    2. avatar
      Eugene

      There is also the issue of withholding taxes. If you purchase a Vanguard ETF off NYSE, you incur 30% withholding taxes on all dividends issued by the ETF.

      You can get around this currently in a few ways:

      1. Invest in a Vanguard ETF domiciled in Ireland. You incur a 15% withholding tax

      2. Invest via an international broker that lets you exchange as close to the spot rate as possible. Interactive Brokers is currently the best I know. You get a rate almost equal to spot rates (1-2 basis points only). If you invest via local bank’s brokerage, they’ll rip you off in the spread.

      3. Ideally, if HKSE starts offering a broader range of ETF, it’ll be the better choice since you don’t incur withholding taxes. (currently HKSE only offers Asia Ex-Japan)

  2. avatar
    Jacques

    Great news ! I hope the SG market is next in line. I just started investing in a couple of Vanguard ETFs and gasped when I saw the exchange rate spread between the board and the bank ones.

    1. avatar
      Andrew Hallam

      Hi Jacques,

      Depending on your brokerage, the spread can be steep. Ironically, the Singapore brokerages that offer the lowest purchase commissions (Standard Chartered) gouge you the most in the exchange rate department.

  3. avatar
    An Average Guy

    Wow, great news.. One more step closer to Vanguard ETFs in Singapore! The exchange rate is the main reason I've steered clear of Vanguard ETFs using my Standard Chartered trading account.

    By the way, I dropped you a message via the contact form, not sure if you've seen it. Betterment is an automated monthly investment into a blend of two baskets: Treasury Bond Exchange Traded Funds (ETFs) and Stock Market ETFs with low fees in exchange for not having to bother with rebalancing. Might be useful to folks from the United States =)

  4. avatar
    Chris Wang

    I did a little investigation about it. The ETF is VANGUARD FTSE ASIA EX JAPAN INDEX ETF, which tracks FTSE Asia Pacific ex Japan, Australia and New Zealand Index and will be listed in HKEX at 15,May . Compared with the other Vanguard ETF, this ETF TER is a little bit highter : 0.38% but good to know that the trading currency use the local currency HK dollar.

    This is the product prospectus :https://www.vanguard.com.hk/documents/ftse-asia-ex-japan-index-etf-prospectus-en.pdf

  5. avatar
    Rhonda

    Hey this is great news!! Andrew, I have been reading your blog (and have read your book!) and am getting ready to begin index investing, AND I happen to be moving to Hong Kong in a couple of months!

    As I embark on this new adventure, can you or anyone else out there recommend a worthwhile brokerage? or is DBS Vickers the best option in HK?

    Many thanks from a 'future millionaire teacher!

  6. avatar
    Barry

    An interesting read on the news

    The debate over active versus passive investment management has reignited after a giant US pension fund threatened to sack its entire roster of active managers for underperforming. This long-standing argument centres around the value of stock pickers (or active management) and the fees they charge in light of the evidence that shows they fail to beat low-cost index funds (or passive management) most of the time.

    US pension fund giant CalPERs stoked the embers in late March when the $US255?billion fund said it would begin a five-month review of its allocation to active managers and flagged the prospect of going 100 per cent passive. Aside from leaving an industry of overpaid US fund managers shaking in their Ferragamo loafers, it has implications for the local industry as many of the same factors are at play in Australia.

    1. avatar
      Andrew Hallam

      That's funny Barry, but it's their own fault for not doing the research on passive versus active management. Historically, more than 70% of corporate pensions under-perform a passive approach. And those that do outperform in one decade aren't the same that typically outperform the next. I don't mean to sound critical, but being surprised that their money managers are doing poorly reflects their ignorance, not their sophistication.

  7. avatar
    Jeff Horton

    About ETFs in general: I am currently invested for the long term (retirement) in three of Vanguard’s bond and stock index funds. I’ve been looking at the returns in their various sector ETFs as I have a gift coming this summer in the low five figures. Broadly speaking, is it a good idea to invest in both index funds for a bit more security AND in sensible ETFs in search of higher returns? If so, what do you think would be a good ratio within my entire portfolio of index funds to ETFs?

  8. avatar
    Ash

    Hi Andrew,
    I have been waiting for Vanguard ETFs for ages in Singapore. In the absence of that, I have had to bite the bullet and invest through the Lion Global Infinity funds. My concern is around the viability of the funds – is there any danger that the funds can fold overnight and that investors have no choice but to sell at whatever the price?

    Any other options for people to invest in a Vanguard type portfolio through unit trusts/mutual funds in Singapore?

    Thanks
    Ash

  9. avatar
    GVK

    Hi Andrew, Any article on the new Vanguard Canada ETF’s?
    Review on Vanguard Canada might help many of your followers.

  10. avatar
    Sean

    Hi Andrew,

    You write here that “their acceptance (into the [Hong Kong] exchange) is a great sign. Those living in Hong Kong may be able to purchase global ETFs without a currency hit.”

    This is interesting as Vanguard might offer a total world stock market ETF in the Hong Kong currency BUT the underlying base currency of the ETF would still be US dollar.

    So in that scenario, would Hong Kong investors really be avoiding a currency hit? I mean, you have the same situation in Europe, where Vanguard offer ETFs like VWRL and VUSA in euros. Great, I can buy these ETFs with euros. But the base currency of these ETFs is still US dollar, which is probably responsible for the fact that VUSA does not follow VOO in terms of the yearly ups and downs of the market even though both contain exactly the same businesses!

    I even called Vanguard’s Netherlands office yesterday to ask them about this and they point blank refused to comment on the tracking discrepancy. They further said that the annual report for their European-domiciled ETFs live VUSA and VWRL contain data about the fund’s performance in USD only. To get an analysis explaining the reason behind, and difference caused by the tracking discrepancy, they told me to “speak to my financial advisor”. All in all, a very frustrating phone call and I am no closer to finding the answer to one of my main pain point questions:

    Is it wise to buy an ETF like VUSA in euros when the base currency is USD?

    1. avatar
      Andrew Hallam

      Sean, the currency through which you purchase the ETF isn’t relevant. An Aussie ETF purchased in euros will be affected be the Aussie market and dollar, not the euro. A global ETF purchased in UK pounds will not be affected by swings in the UK pound, but by the global markets and currencies within it. By purchasing in a different currency, you will pay an annoying little exchange rate spread when converting your initial money to that currency for the purchase, but the currency you purchase the product in will have no effect on the profits or losses of the ETF.

      1. avatar
        Andrew Hallam

        Just remember, Sean, that if you looked at the performance figures for two U.S. S&P 500 indexes, one reporting its profits or losses in CDN dollars and the other in Euros, they will report different profits or losses based on how they stacked up in the reportable currency. But if converted to USD (and if it’s a U.S. S&P 500, that’s what matters) their profits or losses will be identical. In other words, assume the S&P 500 was flat for a decade, but the British pound lost 50% for the decade. In this case, a U.S. S&P 500 index would show profits of 100%. Yet the S&P 500 wouldn’t really have made a profit at all. Would you have made 100% profit? Yes and no. If you had an equal amount of money invested in a S&P 500 index purchased in USD off the U.S. market instead (and the U.S. stock market went nowhere for a year) the reported profit would be zero. But if you sold and converted your USD to pounds, you would have made a 100% profit in British pounds, if the pound had dropped by 50%. Bottom line? The currency through which you purchase the ETF means nothing but an irritating spread/commission upon purchase. The real factor of profits or losses will depend on the currency and market through which the ETF is invested, not the currency through which it is necessarily quoted. I hope this clears things up for you.

        Andrew

        1. avatar
          Sean

          I don’t think I’m quite there yet, Andrew :-)

          I have noticed, for example, that VOO might rise 0.3% in one day but VUSA (the European-domiciled S&P500 ETF) might only rise 0.15% on the very same day. If I’m understanding you correctly, this difference is pretty much an illusion and in reality they would both have risen the same amount.

          But consider the following example:
          – If I invest 10,000 USD in VOO and it grows 10% in a year, I now have 11,000 USD if I choose to sell.
          – If on the other hand I have 10,000 EUR invested in VUSA and, due to the discrepancy shown above, it only grows 7% in the same year that VOO grew 10%, I only have 10,700.

          This seems like a real difference to my pocket. I know the currencies are different but the proportions are the same (10k USD vs 10k EUR both invested in the same index). Surely the USD investor is doing better than me by 3%? If this 3% discrepancy was maintained over a 20-year period (the discrepancy is there every single day that you compare VOO and VUSA), surely the USD investor’s account would be reaping huge rewards vs the EUR investor’s account when it comes to selling.

          Once again, apologies for not quite getting it the first time.

          PS: In addition, if the ETF is paying out a USD dividend quarterly, the dividend gets converted to euros if euro is my base brokerage currency (note that a broker like Saxo charges a conversion fee of 50 basis points). Do you recommend that people use set as the base currency of their trading account their home currency? Thanks again.

          1. avatar
            Andrew Hallam

            Sean,

            This is what you wrote:

            – If I invest 10,000 USD in VOO and it grows 10% in a year, I now have 11,000 USD if I choose to sell.
            – If on the other hand I have 10,000 EUR invested in VUSA and, due to the discrepancy shown above, it only grows 7% in the same year that VOO grew 10%, I only have 10,700.

            Your return in USD would be exactly the same once you sold VUSA and converted the proceeds to USD.

            I’m sorry I wasn’t able to explain this well enough to you. But trust me. I’m right.

            Cheers,

            Andrew

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