An investor from the Philippines who wants to put money in U.S. ETFs can either choose from a limited menu of locally available feeder funds with U.S. ETF target funds, or directly open an international brokerage account and buy ETF shares directly. Down below is a simple calculator to determine whether it would be worth going through the hassle of opening an international brokerage account to directly invest in U.S. ETFs.
(more…)Tag: feederfund
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Avoiding home-country bias in the Philippines
Home-country bias is the tendency of an investor to over-invest in his/her country’s domestic equity market in a scale that significantly exceeds the proportion of the size of the domestic market relative to the rest of the world.
Considering that even Americans, whose own stock market is 40% to 50% of the world market, can be guilty of home-country bias, it is not a surprise that investors from much smaller markets like the Philippines also exhibit this behavior. This is shown in the chart below, which visualizes data collected by Sercu and Vanpée from CPIS (December 2005) and World Federation of Exchanges, in their paper, Home bias in international equity portfolios: a review. When that paper was published, Filipinos’ equity portfolios were 99.5% domestic while the domestic market was just 0.1% of the world market cap.
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Are gains from US equity feeder funds taxable by the BIR?
I previously wrote about the lack of information on how the Philippine Bureau of Internal Revenue taxes foreign capital gains, dividends, and interest income. We know that the U.S. imposes a final withholding tax of 25% and 15% on dividend and interest income, respectively for Philippine residents based on the U.S.-Philippines tax treaty. On the other hand, capital gains received by non-resident aliens are not taxed by the U.S.
The BIR has no published rule that sets an explicit final tax rate on foreign capital gains income. Local stock market sales are taxed based on the gross sales amount. Capital gains on shares on unlisted domestic corporations are taxed at 15%. The going assumption then is that any income not subject to an explicit final tax rate is subject to the graduated personal income tax rates.
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Is it worth investing in a US Equity Index feeder fund from the Philippines?
If you’re a Filipino investor and you want your investment portfolio to diversity into U.S. index funds, you have at least two options. One option is to open a trading account with a company like Charles Schwab. This will give direct access to thousands of U.S. stocks and ETFs.
An easier option is to invest in a unit investment trust fund (UITF) that acts as a feeder for a U.S. index fund. One such feeder fund is the BPI Invest U.S. Equity Index Feeder Fund (BPIUSFF). This fund invests directly in the largest ETF in the world, the SPDR S&P 500 Trust ETF (SPY). This ETF has total assets of almost $280 billion as of November 2019. It simply aims to track S&5 500 index of U.S. large cap companies. One reason why people like to invest in index funds is the low expense ratio. SPY’s gross expense ratio is only .0945%.
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