How to maximize your investment returns with UCITS ETFs
Hello!
I have been investing for some time now and I want to share a piece of information which allows me to boost the investment returns without having to change the strategy or increase the exposure to risk.
It works only if you invest in ETF and you would like to reinvest all of the dividends.
Initially, I started investing in the US-based ETFs which are traded on the US stock exchanges (NASDAQ, NYSE…). This was a no-brainer since they usually have the lowest managing fees, largest liquidity and all of the other good stuff.
However, looking deeper into the UCITS ETFs I found that for many cases they allow to save a lot on taxes.
A UCITS ETF is an exchange trading fund that is regulated by the EU directives. Technically, they are the same as any other ETFs but their reporting is EU-complaint.
All ETFs that are traded on the US markets (NASDAQ, NYSE etc) are required by law to distribute a large portion of paid dividends to the investors of the said funds. This creates a taxable event and we, investors, are obligated to pay taxes on this income. Since most of the investors reinvest the dividends back into the fund, receiving them makes little to no sense.
There are UCITS ETFs which are ‘accumulating’. This means that instead of distributing the dividends to the investors, they automatically reinvest them.
You do not receive more shares while this happens. They simply buy more of the underlying stocks which increases the price of the ETF stocks you own. Above the increase of the index they track.
There’s nothing magical about the image above. The VUSD.L performance would look exactly the same if you include the reinvested dividends. However, since you have to pay taxes before reinvesting, it would underperform. And the more time passes, the bigger the gap gets.
Important: In most countries such reinvested dividend are exempt from tax declaration but not in all.
Things to consider:
- Does your country of residency require you to pay taxes on the ‘virtual’ dividends?
- UCITS ETFs usually have larger expense ratio. Does saving on taxes cover the difference?
- Is there a UCITS equivalent of the ETF you would like to invest in? Is there an ‘accumulating’ version of it?
- ETF managers usually reinvest the dividends while rebalancing the fund. Typically, this happens every quarter. Some investors may prefer to reinvest as soon as the dividends are paid out.
A website where you can easily find the accumulating ETFs (or any other UCITS ETFs): https://www.justetf.com/en/find-etf.html