Like Tree2Likes

2800 v/s China Specific ETFs

Closed Thread
Page 1 of 2 1 2 LastLast
  1. #1

    Join Date
    Oct 2006
    Location
    Hong Kong
    Posts
    15,557

    Lightbulb 2800 v/s China Specific ETFs

    Quote Originally Posted by cendrillon:
    China is 15% of world GDP and 30% of world GDP growth. I don't think 10% exposure to China is that overweight.
    Then shouldn't the OP be investing in one of the China specific ETFs listed in HK?

  2. #2

    Join Date
    Feb 2006
    Location
    Kennedy Town
    Posts
    1,014
    Quote Originally Posted by pin:
    Then shouldn't the OP be investing in one of the China specific ETFs listed in HK?
    Tax treatment will be worse. The real question is how correlated is the HSI with the Chinese indices.

  3. #3

    Join Date
    Feb 2006
    Location
    Kennedy Town
    Posts
    1,014
    Original Post Deleted
    WHT in China for dividends is 10%. I believe you'll lose 10% of dividends on the way in.

  4. #4

    Join Date
    Feb 2006
    Location
    Kennedy Town
    Posts
    1,014
    Original Post Deleted
    This is a very interesting point. Consider that the dividend yield of the HSI is around 4%, so that means you'll lose (very roughly) 0.4% to dividend withholding (assuming they're all mainland companies, in practice it'll be a little less).

    The dividend yield for S&P 500 is around 2% so you lose roughly 0.6% to withholding tax. If you look at say VUG with a yield of 1.2% that's only 0.36% withholding

    Point is that the US may not be that tax disadvantaged relative to the Hang Seng Index.

  5. #5

    Join Date
    Feb 2006
    Location
    Kennedy Town
    Posts
    1,014
    Original Post Deleted
    This is very interesting. Thanks for sharing.

    So obviously all companies pay tax on their profits, but it seems it's a good thing to not pay a second round of withholding tax on dividends which are already paid out of post corporate tax profits.

    So my original statement stands that buying a Chinese ETF is worse in terms of tax than buying the Hang Seng Index since most of the HSI companies are from the mainland anyway.

    I do think that between the S&P 500 and HSI an investor can get a good coverage of both EM Asia and the developed west. If someone was pedantic they may want to throw in other developing nation's and western Europe however I think this is not strictly necessary since

    1. US multinationals do a lot of business in these regions anyway and

    2. indices in the US and Europe will be fairly correlated, which decreases the diversification achieved by spreading over US and European indices.

    I'm interested to hear your thoughts on this.
    Last edited by cendrillon; 08-01-2018 at 07:03 PM.

  6. #6

    Join Date
    Feb 2006
    Location
    Kennedy Town
    Posts
    1,014
    Original Post Deleted
    Because the US index has a much lower dividend yield (1.9% for S&P 500 versus 3.9% for the HSI), so although you pay a higher tax rate, you get less dividends and so the effective tax rate (dividend yield times WHT rate) ends up similar.

    However when JR looked into this more it seems that many HSI companies that are headquartered in HK and do business in China don't have WHT on dividends. In that case HK is still a fair bit better than the US.

    So for example if HSI yield is 3.9% and WHT averages to 4% then you are paying 0.156% of your principle in WHT per year. The VUG ETF has a dividend yield of 1.2%, so with WHT at 30% you end up paying 0.36% per year. Looking at 2822/2823 you have a dividend yield of 2% and lose 10% to WHT for a total cost of 0.2% per year, but they have a 1% management fee. If you're willing to use IB you could buy VUSD with a yield of 1.9% and WHT of 15% for a total cost of 0.285%.

    Personally I like the combination of 2800 and VUG and maybe VO. This seems to give the best balance between diversification and reasonable tax rates, and doesn't require you to use IB.
    Last edited by cendrillon; 09-01-2018 at 10:23 AM.

  7. #7

    Join Date
    Dec 2002
    Location
    θ–„ζ‰Άζž—
    Posts
    47,963

    (split this out from the original "what etf" thread)


  8. #8

    Join Date
    Feb 2006
    Location
    Kennedy Town
    Posts
    1,014
    Original Post Deleted
    So lets say a company is headquartered in China. It pays corporate taxes on its profits, then it issues dividends out of those profits post-tax, and then there's an additional 10% withholding tax on top when those dividends get sent to Hong Kong. So if the corporate tax rate is 25% then for every dollar of profit the company earns you will see at most 65 cents in dividends (assuming all profits are paid out as dividends for the sake of discussion).

    In contrast if a company is headquartered in HK then it pays corporate tax in China, then issues dividends in HK with no further tax. In this case for each dollar of profit you have potentially 75 cents of dividends.

    Doesn't it seem that the Hong Kong headquartered company then is better in terms of tax treatment and one is better off going with 2800 over 2822/2823?

  9. #9

    Join Date
    Mar 2010
    Posts
    6,745

    Well, there are many ways to finance a dividend....
    If I spin your example further the company could operate at around break even, pay little to no income tax, take a credit
    ( and deduct the interest rate as expense, if that's possible in PRC ) et voila, votre dividende.

    btw, treatment of interest expense in Trump's new tax bill is something I really dislike.


  10. #10

    Join Date
    Feb 2006
    Location
    Kennedy Town
    Posts
    1,014
    Quote Originally Posted by Morrison:
    Well, there are many ways to finance a dividend....
    If I spin your example further the company could make a loss, pay no income tax, take a credit
    ( and deduct the interest rate as expense, if that's possible in PRC ) et voila, votre dividende.

    btw, treatment of interest expense in Trump's new tax bill is something I really dislike.
    Just to check this response is to JR right? If its to me then as you can see you'll lose 10% of the dividends to WHT in the mainland headquartered company in your example and be worse off than if it was headquartered in Hong Kong.

Closed Thread
Page 1 of 2 1 2 LastLast