Expert’s choice: 5 considerations for trading ETFs on foreign exchanges

 

Many online trading platforms allow investors to buy and sell ETFs listed on exchanges beyond the ASX, including in the US’s NYSE or NASDAQ, UK’s LSE and Europe’s Euronext. Caveat emptor (buyer beware). There are five things investors should consider before they buy shares on an overseas exchange.

Many online trading platforms allow investors to buy and sell ETFs listed on exchanges beyond the ASX, including in the US’s NYSE or NASDAQ, UK’s LSE and Europe’s Euronext. Caveat emptor (buyer beware).


There are five things investors should consider before they buy ETFs on overseas exchanges.

1. Regulatory protection

If you invest on any international exchange your investment will be governed primarily by foreign law. This means you may have to contend with legislation that doesn’t exist in Australia. For example, we have no estate taxes here. In the US, if you own assets there, there are potential US Estate Taxes for which your estate will be liable.

In other jurisdictions, consumer protections or the ability for recourse, may not be available to foreign investors. This is an additional risk you need to consider when investing on overseas exchanges.

Investors need to consider this before they invest and determine if the benefits outweigh the risks.

2. Currency concerns

The Australian suite of ETF products permits you to invest using our local currency. You buy in Australian dollars, any dividends you receive will be in Australian dollars, and should you wish to redeem, it is in Australian dollars. By way of contrast when you buy or sell on an international exchange, a currency conversion takes place, usually with a spread. The spread is a cost.

The spread is the difference between the exchange rate that the currency is bought for and the rate at which the currency is sold. So, when you buy an ETF on NYSE, the Australian dollars in your account will be converted to (buy) US dollars to buy the ETF. Conversely when you redeem that investment, it is redeemed in US dollars before being converted to (buy) Australian dollars, when it lands in your account.

Any dividends you receive as an Australian citizen investing in a foreign country will be in the currency of the country, and as such you are taking a currency risk. Exchange rates can move, impacting dividends, when they are announced, and when they are received. 

3. Hidden fees and price discovery

Many online brokers today offer zero-brokerage for trading in international shares and ETFs. But investors will still pay a hidden commission in the form of Payment For Order Flow (PFOF). This practice routes your order to a specific counterparty, rather than having the market compete for your order at the best price possible. This means investors lose price discovery – which is a method for determining the spot price of an asset through interactions between buyers and sellers, which is what occurs throughout the trading day on ASX.

Another thing to consider is if you are buying and selling on an international exchange which operates at different hours of the day, it is more difficult to time your ETF purchase. Often investors are restricted to buying at the open and can’t trade throughout the overseas trading day.

Price transparency and ease of trading is a benefit of ETFs you are forgoing when you buy them on an international exchange. When you put on your trade on in Australian trading hours it is common that the overseas exchange is closed and you can’t see what the depth looks like – how many sellers there are and how many buyers. You often don’t get to see the price you transact at, so between the time you place your order and the market opening, a lot could have happened in the market and therefore impacting the price of your investment.

This is another consideration investors should be aware when investing on overseas exchanges.  

4. Tax implications

An Australian resident purchasing an internationally listed ETF will find themselves potentially subject to a withholding tax. This is problematic for low income, or tax-exempt investors, because they cannot claim the credit for the withholding tax paid in the jurisdiction you purchased the ETF.

For example, if you purchased an ETF on a US exchange, you are charged a 15% withholding tax, which can be offset. For tax-exempt and low-income investors this is problematic. The other problem US ETF investors encounter is the additional administration, including filling out unwieldly W8-BEN forms.

Another tax consideration is the financial year. Australia is one of the rare cases that have a financial year that ends on 30 June. In most countries the financial tax year coincides with the calendar year. The timing and receipt of income has potential implications when you complete your tax return.

Tax is an important consideration when investing on exchanges internationally.

5. Inability to reinvest dividends

Investors who buy ETFs listed on international exchanges are unable to reinvest their dividends. This is problematic because unless you need the cash flows generated from dividends for income, reinvesting those proceeds to buy more shares in that ETF can compound returns over time, and lead to an even greater dividends down the road.

A worked example: Investing in internationally listed ETFs vs Australian listed ETFs

VanEck’s Morningstar Wide Moat ETF is listed on the ASX and also on a US exchange.

Below are some key differences for an Australian resident who is considering investing in MOAT worth highlighting:

Firstly, both funds track the Morningstar Wide Moat Focus Index, however, ASX: MOAT is an Australian domiciled ETF that is formed, registered and regulated in Australia and is an Australian resident for tax purposes.

If, as an Australian resident you were to invest in the US equivalent BATS: MOAT you would be required to submit a W8-BEN form to the Fund in order to reduce withholdings tax (e.g. from 30% to 15% under the Australia-US double tax treaty.)

Moreover, being governed by foreign law, Australian residents invested in BATS: MOAT will have to contend with legislation that does not exist in Australia – such as potential US Estate taxes. Furthermore, an Australian resident holding BATS: MOAT would find themselves subject to a withholding tax.

By way of contrast, an Australian resident investor in ASX: MOAT does not need to fill out a W8-BEN form. Furthermore, MOAT is governed by Australian law so there are minimal, if any direct foreign law impacts for investors.

The ASX investor in MOAT can reinvest their dividends, they cannot do this in BATS: MOAT, nor does the ASX: MOAT investor need to worry about the currency moving between the announcement of the distribution and when it gets sent to investors.

While the ability to invest on exchanges outside of Australia opens up a range of opportunities, investors need to weigh the potential benefits with the considerations outlined above.

Published: 17 November 2022

Any views expressed are opinions of the author at the time of writing and is not a recommendation to act.

VanEck Investments Limited (ACN 146 596 116 AFSL 416755) (VanEck) is the issuer and responsible entity of all VanEck exchange trades funds (Funds) listed on the ASX. This is general advice only and does not take into account any person’s financial objectives, situation or needs. The product disclosure statement (PDS) and the target market determination (TMD) for all Funds are available at vaneck.com.au. You should consider whether or not an investment in any Fund is appropriate for you. Investments in a Fund involve risks associated with financial markets. These risks vary depending on a Fund’s investment objective. Refer to the applicable PDS and TMD for more details on risks. Investment returns and capital are not guaranteed.

The Morningstar® Wide Moat Focus Index™ was created and is maintained by Morningstar, Inc. Morningstar, Inc. does not sponsor, endorse, issue, sell, or promote the Fund and bears no liability with respect to the Fund or any security. Morningstar®, Morningstar Wide Moat Focus Index™, and Economic Moat™ are trademarks of Morningstar, Inc. and have been licensed for use by VanEck.

Effective June 20, 2016, Morningstar implemented several changes to the Morningstar® Wide Moat Focus Index™ construction rules. Among other changes, the index increased its constituent count from 20 stocks to at least 40 stocks and modified its rebalance and reconstitution methodology. These changes may result in more diversified exposure, lower turnover and longer holding periods for index constituents than under the rules in effect prior to this date.