Home-based exchange-traded funds (ETFs) provide NZ investors with a sizeable tax uplift across both equity and fixed income asset classes, a new study by the Hong Kong arm of EY shows.
According to the EY analysis, investors in NZX-listed ETFs tracking global share indices could garner after-tax returns of up to 15 per cent above similar products domiciled in offshore jurisdictions.
For example, investors in NZ-based ETFs following a broad European index would lose 30 per cent of the fund returns to various taxes compared to 40 per cent for almost identical vehicles housed in other countries.
The July 2020 EY ‘Taxation report for NZ investors’, produced on behalf of the Hong Kong stock exchange (HKEX), local-listed fixed income ETFs would also provide higher after-tax returns than overseas variants, albeit at smaller margins than for equity funds.
EY also developed a handy-dandy calculator allowing investors to compare estimated after-tax returns for ETFs tracking the same index but listed on different exchanges.
For instance, in a single year, $10,000 invested in an NZ-listed ETF following the MSCI World would generate an annual after-tax distribution of $167 on a gross estimated yield of 2.33 per cent – $10 more than a US-housed version of the same index-tracker.
Similarly, an NZX-listed global fixed interest ETF would generate a slightly higher after-tax income than all other offshore-based products covering the same index, the EY calculator shows.
EY notes that while return on investment (ROI) is a key priority, costs play an important role in maximizing ROI”.
“One significant yet lesser understood cost with investing in ETFs is taxation,” EY says. “This is especially true for any cross-border investment which are normally subject to multiple instances of taxation.”
The EY calculator and NZ report come with some caveats – including a limited palate of comparator indices – but the investor tools do provide “evidence that significant differences can arise in after-tax returns for ETFs domiciled in different jurisdictions”, the study says.
Elliott Shadforth, EY Hong Kong wealth and asset management leader, produced the report with a panel of other authors.
The NZX-owned Smartshares is the only issuer of locally domiciled ETFs with a product suite of almost 40 funds, collectively holding more than $4 billion at the last count.
Hugh Stevens, Smartshares chief, said the new tax tools were a welcome addition for NZ investors.
“[The EY report] clearly illustrates why investors should look past the headline management fee when choosing an ETF. NZ ETFs, listed on the NZX, are usually better value when investors look at the total cost of ownership,” Stevens said. “The EY and HKEX work shows that New Zealanders investing in offshore ETFs may be taxed significantly more than they would be if investing through a Smartshares ETF. I also remind investors that tax is not the only difference in total cost. For example, New Zealanders buying US ETFs are usually paying foreign exchange spreads and other charges that vastly outweigh the difference between NZ and offshore ETF management fees.”