Emerging Markets in your SAA

Saw this piece by Aoris which I thought I’d share

https://uploads-ssl.webflow.com/5ba...486699c60f_Aoris_Feature-Article-Mar-2019.pdf

It’s a pretty good summary of why gdp growth is not an indicator of eps growth.

 

I learned recently that while VGE and VAE are both about 42% China, VGE includes China "A-shares" and VAE doesn't (if this is incorrect, please let me know). I'm wondering how people take this into account when choosing between VGE and VAE. Do you want to have A-shares or do you want to avoid them, or are you indifferent towards them?

Links that might be useful:
Chinese H-Shares vs. A-Shares: What's the Difference?
Vanguard Australia - Vanguard Emerging Markets ETF first to offer China A-Shares

Another difference is that VGE contains small caps and VAE doesn't.

 

Good one. A lot of those ideas are discussed in this video:

 

I bought some VAE back in April and will give it around 10% weighting in my portfolio. Honestly, I didn't give consideration to the A or H share side of things simply because it hasn't received much attention from what I've seen in ETF investor discussion. Perhaps there will be more literature forthcoming now given A shares greater accessibility for foreign investors. I chose VAE over VGE because I am more bullish on Asia in the long term.

 

Thanks for your reply @George Smiley.

 

Both of the true EM ETF’s (VGE and IEM) don’t hold direct shares in the Australian fund eg VGE holds the NYSE fund VWO and IEM holds EEM

Unfortunately this mean a tax drag of around 0.20% of unrecoverable withholding taxes.

Whilst I’d prefer to hold a market weighted EM fund, I don’t think it is currently worth it and VAE is close enough.
- Lower MER 0.40% vs 0.48% VGE or 0.67% IEM
- No tax drag (0.20%)
- 70+% overlap with VGE
- Includes Korea which matches well with VGS

WEMG from State Street is another alternative that looks like it might hold shares directly in Australia avoiding tax drag, however with a 0.65% MER and no Korea, I think I’ll stick with VAE

Pick your poison
VAE - missing non Asia EM
VGE - missing Korea and suffers tax drag
IEM - High MER, suffers tax drag
WEMG - High MER, missing Korea

 

Could you please explain what you mean by “tax drag”?

In my understanding, tax drag refers to loss of franking credits due to holding Australian company shares in an internationally domiciled fund (i.e. VEU). VGE does not contain any Australian company shares so I’m not sure what you meant by tax drag?

Also, VGE is an Australian domiciled ETF and I believe that solves the double taxation issue despite investing in NYSE VWO?

 

Yup. And I can tell you the fastest growing economy in Asia is Vietnam. Go google that. China is not China of 1990. China, Korea, Japan all operate out of there and its going nuts. Many big four accounting firms have reports on that to read.

 

Yes he's about the only YT guy that I like on finance stuff. Him and MeetKevin. Emotionless man is more finance savvy though. Smooth Kev is a shrewd RE guy

 

Tax drag also occurs when withholding tax that could be normally offset via a double taxation treaty cannot be because the another country (the US in this case) is in between Australia and the country of the asset itself.

Domiciling a fund in Australia avoids US estate tax issues and enables DRP, however does not eliminate tax drag unless the individual shares are held directly.

VEU suffers from both variants (withholding tax and franking credits tax drag)
VGE doesn’t hold Australian equities so only suffers from the loss of withholding taxes.

This page explains it well.
Fund domicile and avoidable US taxes - Passive Investing Australia

This article is Canadian but equally applies to Australia. It even mentions VWO with a tax drag of 0.29%
https://www.pwlcapital.com/wp-conte...tti_Foreign_Withholding_Taxes_Hyperlinked.pdf

I don’t think people loading up on VTS/VEU to get the super low MER realise the tax drag brings costs up to be comparable to VGS

 

VTS?

I thought with VTS its mostly estate tax that is the issue.

Any drawbacks on investing in IVV now that it is Australian domiciled?

Cheers
Oracle

 

Neither VTS and IVV suffer tax drag as they hold US assets and Australia has a double taxation treaty with the US so you can claim withholding tax offsets.

Tax drag only occurs when an intermediate country is in between Eg VEU and VGE hold non US assets in the US. The tax withheld by the countries of those assets is lost as we are unable to claim a tax offset

 

Mate thanks heaps for that, I did not realise VGE has this issue, as now the MER difference between VGE and VAE widens even more. I will need to reconsider VGE...

 

Vanguard Unlisted Wholesale EM does not have this issue but is slightly more expensive and follows MSCI EM index which includes S.Korea so is a better match with VGS if you are on platform (otherwise a bit of a PITA)

 

Looks like a good option if you can stomach the 0.57% MER and are on the platform.

I was on the wholesale platform until recently before switching to ETF’s as I didn’t like other investors transactions triggering CGT events for me.

BPay was very convenient though.

 

It’s a balance, I’ve got a mix of etfs and unlisted index funds and unlisted active funds. ETF is generally the more tax efficient vehicle. All on BT Panorama.

 

Frustratingly the underlying fund of VGE, VWO has a MER of 0.10% in the US. There really is no valid reason for Vanguard Australia to charge 0.48%.

If VGE had an MER of 0.10%, I’d wear the tax drag of 0.36% and hold it instead of VAE, combined with VGS/VISM, effectively buying the haystack.

Note, rerunning the calculations on the recently released 30 June 2020 annual report, the VGE tax drag could be as bad as 0.36%.

Foreign tax withheld = 1,617,000
Total Distribution = 9,874,000
Current Dividend Yield of VGE (factsheet) = 2.57%
Calculation = 1617/(1617+9874)*2.57% = 0.36%

 

I don't understand why VGE is not a subfund of the emerging market managed fund. The tracked index mismatch as it stands between VGE & VGS is poor form if you cared about your ETF offerings.

I can't justify VISM either when near enough small/mid diversification can be obtained with IJH/IJR for 0.07%.

It's about time vanguard lifted their game in Australia me thinks. Probably won't happen until Blackrock move to local replication for IWLD and get some serious market share.

For passive equity ETF's Vanguards pretty much acting like lazy entrenched encumbents here in Australia. Blackrock doing more of the leading. But overall our local domiciled offerings are still pretty backwater and comprimised to what they could be. Is a low cost local replication all cap total investible market ex Australia too much to ask for?

 

Agree. Need to remember Vanguard Australia is for profit just like the rest unlike Vanguard US.

I assume they went with VWO for VGE as they wanted China A shares or perhaps just to increase their profit given the low cost of VWO.

IJR is probably good enough for small caps however what turned me off is that the S&P 600 is only about 3% of the total US market compared to 14% for MSCI (VISM). That’s missing 10% of the US market.

You could add IJH but doesn’t that then overlap with VGS?

At a 10% allocation you are only talking a 2.5 basis point difference in cost between IJR and VISM or $250 per year on a $1M portfolio

 

This article (link stolen from passive investing australia) shows how the different indexes split large, medium and small caps)

Investing With Style: How Size and Value Actually Work