Charles Schwab vs Capital One 360 ATM Exchange Rate

As a follow up to my previous post comparing effective ATM exchange rates for withdrawing Philippine pesos from US dollar accounts from Charles Schwab and Transferwise, I now compare Charles Schwab and Capital One 360.

To recap, I opened a Schwab One International account from the Philippines. With this account I availed myself of a Schwab ATM/debit card as well as a Schwab checkbook. Note that you don’t need to open a Schwab Bank High Yield Investor Checking Account to get the ATM card and checkbook. That Schwab checking account is only available to US residents. My ATM card and checkbook can be used to access the free, uninvested cash available in my brokerage account. Schwab promises advertises that “unlimited ATM fee rebates apply to cash withdrawals”. It also does not have any foreign transaction fee.

The ATM/debit card from Capital One 360 is another popular card for world travelers as it offers no foreign transaction fee withdrawals. It does not refund ATM fees.

For this comparison, I again used an ATM from HSBC. HSBC ATMs may be the only ATMs in the Philippines which do not charge any fee.

I withdrew PHP 25,000 in both instances. The USD-PHP exchange rates posted by Google, XE, and TransferWise at that time were 50.56, 50.6024, and 50.58 respectively.

AccountPHP WithdrawnUSD DeductedExchange Rate
Capital One 360 (Mastercard)25,000495.1150.49
Charles Schwab (Visa) 25,000 494.46 50.56

The winner: Charles Schwab

The true costs of FMETF

First Metro ETF (FMETF) is the only ETF available in the Philippine Stock Market. I’ve written previously about how FMETF compares to ETFs in Vietnam and Thailand. I’ve also noted how FMETF’s assets under management is dwarfed by BPIPEIF, a similar index tracker in UITF form.

Whenever one mentions FMETF, it is invariable described as a low-cost index tracker. Its management fee is supposed to be 0.5%. That it in itself is low by Philippine standards when comparing to mutual fund management and UITF trust fees. For a supposed passive fund, it is still high when comparing to well-established ETFs in the US like SPY and VTI.

Management fees are a percentage of the fund’s assets under management. According to one of FMETF’s quarterly reports, the “management fee is accrued over time 0.50% of average daily net asset value (NAV) of the Fund plus 12.00% value added tax (VAT)”. This makes the effective management fee equivalent to 0.56%. But the fund has other operating expenses that are not charged to the management fee. These fees include custodian and transfer agency fees, information technology expenses, regulatory and filing fees, taxes and licenses, brokers’ commissions, and directors’ and officers’ fees. How do these other fees compare to the management fee? I looked at FMETF’s last three annual reports. Using a naive assumption that the non-management fee expenses scale with the NAV in the same proportion as the management fee, I calculated the “effective expense ratio”.

 201820172016
Management Fees (0.56% including VAT)8,486,866.00
6,672,251.00
5,586,013.00
Total Expenses (including Management Fees)12,327,600.00
9,900,817.00
8,529,548.00
"Effective Expense Ratio"
0.813%0.831%0.855%

For the past three years, the “effective expense ratio” ranged from 0.81% to 0.85%. It’s encouraging that the number is decreasing as the fund’s NAV increases. This probably means that some of the expenses are fixed overhead costs that do not scale with the NAV.

Apart from those fees, an FMETF investor is also faced with commissions and taxes for buying and selling ETF shares. As I discussed in the costs of stock trading in the Philippines, buying fees amount to about 0.29% while selling fees including taxes amount to about 0.89%. So about 1.18% buying and selling fees are amortized over the period of owning an FMETF position. For positions shorter than two years, the sum of the fund’s expense ratio and these buying/selling fees will make the total cost closer to BPIPEIF’s fees.

Speaking of BPIPEIF, while its states trust fee is 1%, it does not include custodianship fees of 0.0166% and auditor fees of 0.0019%. Thus at the minimum BPIPEIF’s fees amount to 1.0185%. I do not know if expenses similar to the ones listed above for FMETF are charged to the trust fee. My guess is they are not. I haven’t found any BPIPEIF annual report to see how they break down their total expenses.

 

FMETF vs BPI Invest Philippine Equity Index Fund Assets

I previously compared FMETF with ETFs from neighboring Asian countries and found that FMETF’s total assets under management as percentage of the market capitalization of the index it tracks seems low compared to ETFs from Vietnam and Thailand. I noted that one reason may be due to the availability of mutual funds and unit investment trust funds (UITFs) that also track the same PSE Composite Index (PSEi).

One such UITF is the BPI Invest Philippine Equity Index Fund (BPIPEIF). As of this posting, its total assets amount to almost PHP 49 billion. In comparison, FMETF has total assets amounting to PHP 1.7 billion. I then dug up the total assets of each fund over the past five years as shown in the chart. BPIPEIF has grown more than 9 times while FMETF barely doubled. Today, BPIPEIF’s assets is more than 28 times that of FMETF.

I find this a little puzzling because FMETF’s fee is just 0.50% compared to BPIPEIF’s 1% (1.5% before 2018). Conventional wisdom tells me investors would prefer the lower fee ETF. Why are billions pouring into BPI’s UITF but not to FMETF? Could BPI’s returns be higher or the same despite its higher fees? I haven’t really looked into this in detail. Is it because it’s simply easier to invest in the UITF if you’re a BPI client because you don’t need to open a separate brokerage account? After 6 years in the market, are many investors still not aware of FMETF and its lower fees? What am I missing?

 

ETFs in Philippines versus Thailand and Vietnam

FMETF is currently the only exchange-traded fund (ETF) available in the Philippine Stock Exchange. FMETF was launched in 2013 and aims to track the performance of the PSE Composite Index (PSEI), which tracks 30 companies in the Philippine Stock Exchange.

As of November 4, 2019, FMETF’s total assets is PHP  1,680,365,665.87 or about $33.3 million. In comparison, the total PSEi market capitalization is PHP 10,073,517,502,927.30 or about $199.4 billion. So, FMETF’s market cap is 0.0167% of that of the PSEi, six years after it was first introduced. And again in that span of time, no other ETF was introduced in the market.

I was curious how ETFs in a neighboring countries fare. The Stock Exchange of Thailand (SET) has a quite a few ETFs available. The TDEX ETF introduced in 2007 tracks the SET50 index, and the ETF has total assets of $3.1 billion compared to SET50 capitalization of  $388 billion. TDEX’s market cap is about 0.8% of that of the SET50 index. Keep in mind that there several ETFs in the Thailand market, some covering the larger SET100 and quite a few covering specific sectors. Needless to say, the Thai stock market is larger than the Philippine market.

On the other hand, Vietnam’s Ho Chi Minh Stock Exchange is smaller than the Philippine market. There are two ETFs available. The VFMVN30 ETF, launched in 2014, tracks the VN30 index. It has total assets amounting to $280 million compared to the VN30 total capitalization of about $44.2 billion. So the VFMVN30 ETF’s market cap is about 0.63% of that of the VN30 index. Another ETF, the  SSIAM VNX50, tracks another index.

Note that the largest ETF in the world, SPY, has about 1% of the capitalization of the S&P 500 that it tracks. Now, are these percentages a valid metric for comparison? I don’t know. It’s interesting that in absolute asset terms, Vietnam’s VFMVN30 ETF is more than 8 times bigger than the FMETF. Why is the FMETF’s market cap percentage so low compared to the cap of the index it tracks? While there’s no other ETF to invest in, there are quite a few mutual funds and so-called unit investment trust funds (UITFs) that also track the same index. That could dampen interest in FMETF.

Limits on foreign ownership of Philippine companies may also be another factor limiting interest in FMETF. Interestingly, the VFMVN30  ETF supposedly has no foreign ownership limit. In fact, it is now also listed in the Thai stock exchange as a depository receipt.

TransferWise vs Charles Schwab Exchange Rate at a Philippine ATM

TransferWise is an online money transfer fintech company. What’s great about them is they try to be transparent with their fees for transferring money internationally. They promise the best exchange rate possible, but they do charge fees for ACH bank transfers that are otherwise free for regular banks. In most cases they are cheaper than using wire transfer through your bank or services like Western Union or MoneyGram. They also offer a product called the Borderless account which allows you to have multiple currencies in your account. It also comes with an ATM/debit card you can use internationally. This service seems to be popular with so-called digital nomads. I guess this is also a good account for getting cash when you are travelling internationally.

Now, an ATM/debit card from Charles Schwab is one of the most highly recommended cards for international travelers, primarily because Schwab refunds ATM fees worldwide. These are fees that the ATM machine charges you on top of your withdrawal even if your bank itself does not charge any other fee.

In the Philippines, ATM fees for foreign bank cards are at least PHP 200 or about $4. Needless to say, this amount is pretty exorbitant. If you’re making multiple withdrawals, the fees will easily add up to a significant amount.

In terms of ATM fees, the Charles Schwab ATM card beats TransferWise hands-down. TransferWise also limits you to $250 USD withdrawal every 30-day rolling period before they charge you a 2% fee. Again, Charles Schwab comes out as the winner in this regard.

Now, if you have access to a fee-free ATM and if you do not need to withdraw more than $250 every 30 days, the relevant point of comparison between TransferWise and Charles Schwab would be the effective exchange rate you receive. One day last week, I withdrew from both accounts minutes apart to compare. At that time, TransferWise was quoting a PHP 51.19 to USD 1 rate, while xe.com had 51.2182 PHP.

I withdrew PHP 15000 from Schwab. This deducted $293.04 from my account for an effective rate of PHP 51.18755 to USD 1. On the other hand I withdrew PHP 1000 from TransferWise and while they indeed used the quoted PHP 51.19 rate, they applied a currency  conversion fee of USD 0.11, since I don’t have PHP balance in my account. Ultimately, USD 19.65 was withdrawn from my account for an effective rate of PHP 50.89 to USD 1. Had I withdrawn the same PHP 15000 the fee would have been USD 1.72, with the same effective rate of PHP 50.89 to USD 1. The currency conversion fee appears to be about 0.577%. Again, Charles Schwab beats TransferWise.  In both cases I used an HSBC ATM which does not charge any extra fee.

If your main use for such an ATM card is to withdraw cash with the best exchange rate, I think Schwab is the best choice. If you’re an American, you can open a Schwab account with no minimum balance. You are able to transfer to to the account using ACH transfers fee-free, unlike with TransferWise. Note that Schwab may have a problem if it starts to think that you’re permanently living abroad and may require you to open a proper Schwab International account.

On the other hand TransferWise may have features that you may find useful, so it’s still worth checking out. In terms of international money transfer fees, I think they are very competitive. But  I think the Charles Schwab ATM is superior as a travelers ATM card. Other alternatives to Charles Schwab that offer competitive exchange rates and zero foreign transaction fees for ATM withdrawals include Capital One 360 checking and Fidelity Cash Management accounts. The latter also refunds ATM fees.

Tax-loss harvesting in the Philippine stock market?

In the US, losses incurred from selling stocks from losing investments can be used to lower capital gains from winning trades.Short-term capital gains are taxed as though they are ordinary income which is taxed based on a progressive tax table. Near the end of the year, if you already have realized some gains (that you’ll have to pay taxes on) and are still holding on to some losing positions, you may decide to cut your losses and sell your losing stock positions. This will allow you to harvest losses to offset some of your gains, thereby reducing taxes that you’ll have to pay. If you don’t have any gains to offset, you can also reduce your ordinary income (wages, etc.) by up to $3,000 of your losses. In a way, this may encourage you to stop holding to that losing stock and cut your losses, and also reduce your tax bill. On the other hand, the stock might recover and you’ll miss out on it. You’re not allowed to buy the stock again within 30 days of selling it, and still be able to harvest the loss, because of wash sale rules.

The taxation of capital gains in the Philippine Stock Exchange is a bit different. Capital gains on stocks traded in the Philippine stock market are not  assessed a specific capital gains tax rate. Capital gains are also not treated like ordinary income. Instead, every time you sell stocks, there is a so-called stock transaction tax of 0.6% that is levied on the gross selling amount (exclusive of commissions). This tax is automatically withheld by the broker. With this kind of tax, the higher your capital gains are (as conventionally defined), the absolute amount of the stock transaction tax becomes a lower percentage of your profits. For example, if you sell your shares when its price has increased by 10%, the stock transaction tax would just be about 7% of your net profits. At 20% stock price increase, the “effective capital gains tax rate” is just about 3.7%. Considering that the lowest marginal rate for ordinary income after the first PHP 250,000 is 20%, these “effective capital gains rates” are pretty low, that is if you’re making profits.

Note that the stock transaction tax rate was only recently raised to 0.6% from 0.5% in 2018 because of a new tax law. There is a new proposed tax law that aims to eventually reduce this rate to 0.1% after a few years.

But what does this tell us about tax-loss harvesting? Since the stock transaction is levied on the gross selling amount, the actual net capital gains or losses are not accounted for. You pay the stock transaction tax even when you are getting rid of a losing stock position. Capital losses cannot be used to offset capital gains to reduce the tax burden. In short, the concept of tax-loss harvesting is not applicable in the Philippine stock market.

Opening a Charles Schwab Brokerage Account from the Philippines

In the process of moving from the US back home to the Philippines, I had to make certain arrangements with regard to my financial assets in the US. I maintained taxable equity accounts with Wealthfront and Robinhood, both of which do not cater to non-resident aliens. While I was a “resident alien for tax purposes” while I was living in the US, I am now properly classified as a non-resident alien after returning to the Philippines.

Many such brokerages in the US do not cater to non-resident aliens and even US citizens living abroad because there are a lot of regulations to comply with (FATCA, among others). Fortunately, the bigger online brokers like Charles Schwab, TD Ameritrade, and Interactive Brokers do make their services available to non-resident aliens.

There are pros and cons with each broker. For example, Interactive Brokers requires a minimum balance of $100,000 to avoid a $10 monthly fee if your trades don’t generate $10 commissions in a month. Interactive Brokers does make available certain non-US domiciled ETFs that are more tax-advantageous for residents of countries like the Philippines whose tax treaty with the US requires the broker to withhold 25% of dividends for US domiciled equities/funds.

I’ve decided to open account with Charles Schwab International and transfer my assets there.  They have a minimum opening balance requirement of $25,000. I’m not quite sure what happens if the balance falls below $25,000.

Schwab requires  a copy of your passport and proof of billing to open an account. An IRS Form W-8BEN is also required to properly establish your status as a non-resident alien and claim tax treaty benefits. Without a form W-8BEN all capital gains, dividends, and interest income will have a withholding tax rate of 30%. The US-Philippines tax treaty reduces the rate to 25% for dividends and 15% for interest income. No tax will be withheld from capital gains as long as you submit a proper form W-8BEN.

I transferred funds from my US bank account using ACH transfer. If I was transferring from the Philippines, I would have to use wire transfer.

One of the nice features of the Schwab account is that you can avail of their Visa debit/ATM card that allows you to withdraw from most ATMs. Any ATM fee will be refunded by Schwab every month. Schwab sent my ATM card by Fedex International Priority. I also requested checks for my account. I’ll explore if I can use these checks to deposit to a local US dollar account. Schwab sent the checkbook by postal mail. I had to go to the local post office and pay PHP 112 “postal handling fee” to claim the package.

Schwab recently reduced their trading commissions to $0 for stocks. That means buying and selling US equities and ETFs now costs nothing.

 

Key requirements for opening a Schwab One International Account
  • Minimum opening deposit: $25,000
  • Documentary requirements:
    • Passport
    • Proof of Billing
    • IRS Form W-8BEN
      • Used to claim Philippines Tax Treaty Benefits: 25% withholding for dividends, 15% withholding for interest
  • Deposit money:
    • Wire transfer
    • ACH transfer from US bank account
  • Withdraw  money:
    • ACH transfer from US bank account
    • ATM/Debit card (ATM fees refunded)

Costs of stock trading in the Philippines

Having been used to the mechanics of trading stocks in the US stock market, there’s a bit of a learning curve in understanding how trading stocks in the Philippine Stock Exchange works.

The first major difference is with regards to online broker commissions. In the US, flat-rate commissions typically ranging from $4.95 to $7.95 have been commonplace for the past several years. These were paid for each buy and sell transaction regardless of transaction size. Zero-free commissions were popularized by Robinhood. In October 2019, more established brokers like Charles Schwab, TD Ameritrade, E*TRADE, and others followed suit by reducing their commissions to zero. So it’s now practically free to trade stocks in the US stock market. You’ll just have to take care of paying capital gains taxes when you file your tax return.

In the Philippines, commissions are percentage-based. My online broker BDO Nomura charges the following fees for BUYING stocks:

  •  Securities Clearing Corporation of the Philippines (SCCP) fee – 0.010% of the gross amount
  • Broker’s commission – 0.25% of the gross amount (minimum PHP 20)
  • Value Added Tax (VAT) – 12% of the broker’s commission
  • Total: 0.29% of gross amount

On the other hand, the fees for SELLING stocks are:

  • Securities Clearing Corporation of the Philippines (SCCP) fee – 0.010% of the gross amount
  • Broker’s commission – 0.25% of the gross amount (minimum PHP 20)
  • Value Added Tax (VAT) – 12% of the broker’s commission
  • Sales Tax – 0.60% of the gross selling amount
  • Total: 0.89% of the gross amount

Ideally, the minimum gross transaction amount should be PHP 8,000 so as not to be “shortchanged” by the minimum broker’s commission of PHP 20.

One can do the math and see that the stock price has to increase by about 1.1906% to break even with the buying and selling fees. If you buy and sell the stock at the same price, you have a 1.18% loss.

Speaking of gains and losses, another important difference between trading stocks in the US and in the Philippines is how gains and losses are taxed. In the US you’ll pay tax on your net capital gains (minus capital losses) based on the graduated income tax table if they are short term capital gains. If they are long term capital gains, they’re taxed at a lower rate. This information is filed with your regular tax return.

In the Philippines, with stocks traded in the local stock exchange, there appears to be no more filing requirement for any capital gains tax, as the broker has already collected the sales tax of 0.60% of the gross selling amount. This means you’re taxed every time you sell even if it’s at a loss. I have not found any literature on whether you can deduct losses from stock market trading in your Philippine tax return, so the concept of “tax loss harvesting” is probably not applicable in the Philippines.

Philippine Banking Culture Shock: Unsolicited Ready-to-Activate Credit Cards

After coming back home to the Philippines, I decided to open a bank account with Banco de Oro (BDO). I chose BDO because it has several branches and, in fact, there is one five minutes away from where I live. I first opened a Peso (PHP) account followed by a US dollar account a few months later. Since opening those accounts, my average combined balance did not exceed the equivalent of $3,000.

About 10 months after I opened the account, I was surprised to receive a ready-to-activate BDO credit card by courier. I did not apply for any such credit card. I had no intention of applying for any credit card since I am not currently working and these credit card applications require some form of employment certificate. I also still have active US credit cards that I can use.

In the US, it is common to receive offers for pre-approved credit cards in the mail, but one still has to complete an application and provide the required financial information. Receiving a pre-approved credit card offer does not guarantee approval.

The BDO credit card I received was ready to use after activation. It has a credit limit of PHP100,000. After a quick Google search, I read that this practice of sending unsolicited cards by Philippine banks has been explicitly banned by the Bangko Sentral ng Pilipinas (BSP):

BSP Clarifies Existing Regulations Prohibiting the Issuance of Pre-Approved Credit Cards

08.27.2014

The Bangko Sentral ng Pilipinas (BSP), in its Resolution No. 1055 dated 02 July 2014, approved the issuance of a Circular to clarify existing regulations prohibiting the issuance of pre-approved credit cards, pursuant to BSP Circular No. 702, Series of 2010.

The Circular seeks to clarify what constitutes pre-approved credit cards. A pre-approved credit card is an unsolicited credit card issued by credit card issuers to consumers who have not applied for such credit card. “Application” has likewise been defined as a documented request of the credit card applicant to a credit card issuer for the availment of a credit card. The intention and consent for the availment of the credit card must be clear and explicit.

The Circular enumerates the acts tantamount to the act of issuing pre-approved credit cards. These include unsolicited calls by the bank to its depositors informing that they already have a credit card from its Credit Card Department due to good standing as a depositor or sending of unsolicited supplementary cards and other cards with added features which are not in replacement or substitute to an existing cardholder’s initial credit card. Moreover, some credit card issuers sought to legitimize the issuance of pre-approved credit cards by contract stipulations on the issuance of additional cards depending on the credit consumption and the payment history of the user. This practice shall be discontinued by having the provisions of the Circular prevail over any contrary stipulations in the contract.

Again, I never applied for any credit card so BDO sending me this card appears to be a clear violation of BSP policy. I nevertheless decided to activate the card because the first-year annual fee is waived. I’ll cancel the card if BDO would refuse to waive the annual fee of PHP2, 400 for succeeding years.

I am of two minds about this incident. On the one hand, it is nice to get a credit card without going through the hassle of applying for one. On the other hand, it is disappointing to see that the biggest bank in the country is actively flouting BSP rules with seeming impunity. I know I can handle my credit properly. There are those who cannot and may quickly find themselves with piling debt.

My experience ordering from Newegg Global Philippines

I decided to purchase a monitor — the LG 27UD58P-B 27″ IPS 4K UHD monitor — from Newegg.com. It’s US list price at the time of purchase was $279.99. The PH price was PHP 15,053.99 for an effective 53.76:1 exchange rate. This exchange rate isn’t too bad and it appears that Newegg still forces the converted price to end with .99, at least for items they sell directly (non-Marketplace items).

After adding the item to the cart, the estimated VAT was PHP 1806.48. This is exactly 12% of the unit price. The shipping cost was PHP 2586.50 for World EggSaver Express (2-3 Business Days). The next lower shipping level, World EggSaver Standard (3-5 Business Days), was priced about PHP 50 lower.

During checkout, the quoted tax changed to PHP 2,298.34 (~15.3%)  and is now labeled as Est. Duty & VAT. I still haven’t figured out what formula Newegg uses to calculate duty and VAT. I tried checking out other monitors and the effective tax ranged from 23% to 35%. All-in, my total order cost was PHP 19938.83 or about $375.

I found the shipping cost to be quite reasonable. The monitor shipping weight is about 22 lbs. If I had used ShippingCart, the shipping cost alone would have been at least $154. Even though I wouldn’t have had to pay the VAT with ShippingCart, I think my over-all cost was still lower ordering from Newegg directly.

I placed the order on 10/29 and it shipped the same day. It was originally scheduled to be delivered on 11/05. It arrived in Manila on 11/01 but did not get cleared by customs until 11/06.

I read some people complain about FedEx charging some clearance and warehouse storage fees upon delivery. Fortunately I did not have to pay any additional fees to FedEx or to the Bureau of Customs. All in all, I think I would directly order from Newegg again if I find the total price, with duty, VAT and shipping to be competitive with using services like ShippingCart.