Tax-Free World Portfolio With Synthetic ETFs

We recently did a video showing how the new iShares S&P 500 Swap ETF (I500) could eliminate Dividend Withholding tax and supercharge your returns.

This newly launched ETF led us to us to thoroughly research a specific type of investment that we were previously overlooking, and we discovered that we could save hundreds of thousands of pounds over a lifetime by using synthetic ETFs rather than physical ETFs.

If you’ve not seen that video, then it’s worth checking out after this one but we’ll try to cover the key areas here too.

Dividend Withholding tax is a sickening hidden tax imposed by many countries around the world. Investors will feel the sting mostly from their US investments as Uncle Sam will take a hefty 15% of your dividends.

We hate dividend taxes of all kinds because they’re taxes on cash flow – not profit. You may receive a dividend of say 3% and get taxed, but if the value of your investments had fallen by say 20% you would be sitting on large losses and yet still be paying taxes – not right at all.

Anyway… US Withholding tax is the most important and the one that you should focus on eliminating first where possible, because it is highly likely that US investments make up the bulk of your portfolio.

A world fund based on market capitalisation will hold about 55% of the portfolio in the US, so it’s clear you want to tackle US withholding tax first.

However, investors should be aware that other countries are often as bad or in many cases even worse. Japan will also withhold 15% of your dividends and Germany will withhold 26.375%.

Synthetic ETFs are a fantastic tool to eliminate withholding tax but as they are more complex to understand than physical ETFs, there is far less choice.

Since the financial crisis of 2009, many synthetic ETFs converted to the physical type but recently there has been a growing demand for tax-efficient synthetic ETFs, and availability has been improving.

In this video, we’re going to look at building a world portfolio of synthetic ETFs and make some comparisons to our world portfolio built from the physical variety. The idea is that we squeeze as much return out of our investments as possible! Let’s check it out!

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