Smartshares US 500 (USF) vs Vanguard S&P 500 (VOO) – Which ETF is better?

Exchange Traded Funds (ETFs) that invest in the S&P 500 index are a convenient and popular way for Kiwis to get exposure to international shares. The S&P 500 index comprises 500 of the largest companies listed in the United States, including some of the world’s most influential and recognisable organisations such as Apple, Microsoft, Tesla, Visa, and Johnson & Johnson.

There are two pathways that New Zealanders typically take to invest in S&P 500 ETFs. One route is through the locally domiciled Smartshares US 500 ETF (USF), which you can buy through Smartshares directly, InvestNow, Sharesies, or via a NZX broker. The other path is to go offshore and buy the NYSE listed Vanguard S&P 500 ETF (VOO) through platforms like Sharesies or Hatch. Both Smartshares and Vanguard ETFs aim to track the same index, so which one is better?

1. Background

There are many options to invest in the S&P 500, but the two in question for this article are:

The Vanguard ETF tracks the S&P 500 index by investing directly into the underlying companies of the index. In other words, they buy the shares of all 500 companies that make up the S&P 500 such as Apple, Tesla, and Visa.

voo holdings
VOO’s top 10 holdings

The Smartshares ETF tracks the S&P 500 index by investing into the Vanguard S&P 500 ETF as their sole holding, instead of directly investing in the underlying companies! Smartshares simply take the Vanguard product and repackage it to create a NZ domiciled product – a product that’s listed on the NZ market, priced in NZ Dollars, and follows the local regulations and tax treatments.

usf holdings
USF’s holdings

It is Smartshares’ standard practice to do this for their global ETFs. For example, those investing in the Smartshares Total World ETF (TWF), will find that this ETF’s sole holding is the Vanguard Total World Stock ETF (VT). So which option is better? – investing in the Smartshares ETF repackaged for NZ investors, or taking the more direct route with the Vanguard ETF?

2. Differences to consider

First off, here’s a few points to consider (and not to consider) when comparing the two Smartshares and Vanguard ETFs.

There’s more to compare than just the management fee

Looking at the management fee of each ETF, we can see there’s quite a difference:

  • Smartshares US 500 ETF – 0.34%
  • Vanguard S&P 500 ETF – 0.03%

The same is true for the Total World ETFs:

  • Smartshares Total World ETF – 0.40%
  • Vanguard Total World Stock ETF – 0.08%

On the surface the Vanguard products look superior because of their vastly lower fees right? Unfortunately management fees aren’t the only fee that investors pay – you need to consider the full cost of ownership that comes with investing in these funds.

For Smartshares ETFs there are the following additional fees:

  • Brokerage – While fund platform InvestNow doesn’t charge any brokerage fees, other services you can use to invest in Smartshares ETFs do. For example, Sharesies charges a brokerage fee of 0.5% (for orders up to $3,000) on Smartshares ETFs.
  • Buy/sell spread – Spreads typically apply when buying and selling Smartshares ETFs. For USF you can expect to pay a small $0.005 per unit premium when buying units in the ETF, and sell your units at a small $0.005 per unit discount. Spreads also apply to Vanguard ETFs, but these are negligible in comparison.
  • Cash drag – Not a fee, but will affect the performance of Smartshares’ ETFs. The Smartshares US 500 ETF is not 100% invested into the Vanguard S&P 500 ETF – instead it has a small holding (less than 0.20%) in cash. This will be a small drag on the ETF’s performance.

For Vanguard ETFs there are also a few additional fees, and assuming you use Sharesies or Hatch to invest, will likely be higher than Smartshares’ additional fees:

  • Foreign exchange – To buy Vanguard ETFs you need to exchange your NZD to USD. This comes with a 0.40%-0.50% fee. The same fee applies when you sell your ETFs and need to convert your USD back to NZD.
  • Brokerage – Sharesies charges a brokerage fee of 0.5% (for orders up to $3,000). Hatch charges a flat brokerage fee of $3 USD (for orders for up to 300 shares).
  • Dividend reinvestment – Neither Sharesies or Hatch offer automatic dividend reinvestment plans. Any dividends are deposited into your USD account, and you have to manually invest them into more units of your ETF. This will incur brokerage fees.

Further Reading:
Buying shares in the USA – Sharesies vs Hatch vs Stake


Tax differences

I won’t get into too much detail on tax differences, but here’s a very quick overview of the rules.

Vanguard

The Vanguard S&P 500 ETF is considered a Foreign Investment Fund (FIF), so FIF tax rules apply. Investors must calculate their taxable income on FIFs by using one of the following methods:

  • Fair Dividend Rate (FDR) – Take 5% of the market value of your FIF investments at the beginning of the income year
  • Cumulative Value (CV) – Calculate the closing value of your FIF investments plus gains, and subtract the opening value of your FIF investments at the start of the income year plus costs
  • De minimis exemption – If the cost of your FIF investments is less than $50,000 you can apply the de minimis exemption, in which case the value of dividends received from your FIF investments = your taxable income

Your taxable income is then multiplied by your marginal tax rate to determine your tax liability. For example, if your FIF investments cost $100,000 and your marginal tax rate was 33%, under the FDR method your taxable income would be $5,000 (5% of $100k), and your tax liability would be $1,650 (33% of $5,000). You would need to declare this income on your IR3 tax return and pay your tax liability to the IRD every year.

Smartshares

The Smartshares US 500 ETF is a New Zealand domiciled Portfolio Investment Entity (PIE). Given this fund invests in a FIF, the fund manager calculates the fund’s taxable income using the FDR method, then passes the tax liability on to investors through a reduction of the fund’s unit price/dividend (which can explain why USF’s dividend yield of 0.34% is lower than VOO’s yield of 1.34%). Therefore your tax liability is taken care of for you automatically (at a tax rate of 28%), and there is no need to do anything in regards to tax returns. However, if you have a tax rate of less than 28% you can declare the excess tax paid on your IR3 tax return to offset your other tax liabilities.

Further Reading:
What taxes do you need to pay on your investments in New Zealand?
Kernel Foreign Tax Calculator (USF is row 1, VOO is row 6 of the spreadsheet)


Price doesn’t matter

On 2 August 2021, the prices of the two ETFs were:

  • Smartshares US 500 ETF – $11.64 NZD
  • Vanguard S&P 500 ETF – $402.33 USD

This huge difference in price is a result of Smartshares cutting up a single unit of VOO into multiple units of USF in their process of repackaging the ETF for NZ investors (given New Zealand investors are more used to smaller unit prices). This price difference is does not make one ETF better than another, nor does it impact performance.

Further Reading:
Smartshares Exchange Traded Funds: Understanding The Unit Price (Passive Income NZ)

Let’s look at the performance of both funds over the last year as an example:

Smartshares USFVanguard VOO
Price as at 3 August 2020$9.06 NZD$297.42 USD
Price as at 2 August 2021$11.64 NZD$402.33 USD
Percentage change28.48%35.27%

However, this isn’t an apples to apples comparison as it doesn’t take into account the change in the exchange rate between USD and NZD. Over the year the USD has gotten weaker over the NZD, so when you convert the price of VOO back to NZD you’ll see that the percentage change is 28.72%, which is almost the same as the return of USF.

USD-NZD exchange rateVanguard VOO (in NZD)
Price as at 3 August 20201.5067$448.12 NZD
Price as at 2 August 20211.4337$576.82 NZD
Percentage change-4.85%28.72%

So let’s say we invested $1,000 into both USF and VOO on 3 August 2020. Ignoring any FX or brokerage fees, one year later we would have the following:

Smartshares USFVanguard VOO
Units owned110.372.23
Value of units at 2 August 2021$1284.71 NZD$1286.31 NZD

So the difference in unit price or number of units owned does not matter. In the next section of this article, we’ll look at a more detailed fee comparison between the two ETFs, taking into account all the fees and taxes involved.

3. Fee comparison

Now that we know what to consider (and what not to consider), we can move on to a full fee comparison between the two Smartshares and Vanguard ETFs. This is quite difficult to do as there are lots of variables to consider. But I plugged the numbers for three different investors into a spreadsheet to see which ETF works out better for them.

The assumptions I used for this comparison are:

  • Platforms used – To invest in USF we’ll use InvestNow, and to invest in VOO we’ll either use Hatch or Sharesies – the cheapest NZ platforms for investing in the respective ETFs.
  • Entry and exit fees – Standard Sharesies and Hatch brokerage and FX fees apply. Assume a buy/sell spread of 0.05% for the Smartshares ETF.
  • Capital gains – Every year we make a capital gain of 7% on the amount invested in the ETF on a given year. The capital gain on USF will be multiplied by 99.8% to reflect its cash holdings of ~0.20%.
  • Dividends – Every year both ETFs pay a 1.5% dividend. This is multiplied by 99.8% for USF to reflect its cash holdings. For USF, these are reinvested automatically. For VOO, these are manually reinvested 2 times per year (to match the dividend payment frequency of USF).
  • Management fees – This is calculated on the amount invested in the ETF on a given year + the 7% capital return.
  • Tax – For VOO the de minimis exemption will be used if the capital invested is less than $50,000 at the start of the year, otherwise use the FDR method. Tax paid by deducting the tax liability from the investment balance at the end of the year. Assume no fees for US tax filing through Hatch (you would usually pay $1.50 USD per year).
  • Exchange rate – The NZD/USD exchange rate remains at 0.70.
  • Portfolio – Our investors hold no other FIF investments on their portfolios.

Now that all the assumptions are out of the way, here’s the results for our three investors!


A. Andrew from Arrowtown

Andrew has $100,000 NZD to invest in a S&P 500 ETF. His tax rate is 33%. After 10 years Andrew’s investment would be worth:

  • Smartshares US 500 ETF (via InvestNow) – $191,472.80
  • Vanguard S&P 500 ETF (via Hatch) – $191,334.39

This is made up of $100,000 of his capital invested, plus:

SmartsharesVanguard
Entry & exit fees (brokerage/spreads/FX)– $145.78– $1,555.77
Returns (capital gain + dividends)+ $115,619.60+ $115,807.85
Management fees– $4,957.79– $437.34
Tax– $19,043.23– $22,480.35

The results across both ETFs are pretty much the same for Andrew, with Smartshares’ higher management fees offset by lower entry & exit fees and favourable tax treatment, given his tax for USF is calculated at a lower rate of 28% (vs 33% for VOO).


B. Barry from Bluff

Barry has $20,000 NZD to invest in a S&P 500 ETF. He will follow this lump sum investment with an additional $1,000 investment every month. His tax rate is 30%.After 10 years Barry’s investment would be worth:

  • Smartshares US 500 ETF (via InvestNow) – $212,756.30
  • Vanguard S&P 500 ETF (via Hatch) – $213,935.95

This is made up of $140,000 of his capital invested, plus:

SmartsharesVanguard
Entry & exit fees (brokerage/spreads/FX)– $176.43– $2,297.91
Returns (capital gain + dividends)+ $92,038.67+ $93,136.74
Management fees– $3,946.63– $351.73
Tax– $15,159.31– $16,465.44

Vanguard is slightly more favourable for Barry, particularly as he’s starting off with an investment balance below $50,000 – given the tax advantage he gets from applying the de minimis exemption for his first three years of investing (after which the cost of his investment exceeds $50,000, and he must use the FDR method).


C. Courtney from Castlepoint

Courtney will invest $250 per month into a S&P 500 ETF. Her tax rate is 17.5%.After 10 years Courtney’s investment would be worth:

  • Smartshares US 500 ETF (via InvestNow) – $44,927.67
  • Vanguard S&P 500 ETF (via Sharesies) – $46,788.35

This is made up of $30,000 of her capital invested, plus:

SmartsharesVanguard
Entry & exit fees (brokerage/spreads/FX)– $37.48– $521.49
Returns (capital gain + dividends)+ $17,519.93+ $17,947.72
Management fees– $751.26– $67.78
Tax– $1,803.52– $554.27

The result from Vanguard is clearly better for Courtney. The low management fee and tax advantage she gets from applying the de minimis exemption is more than enough to offset Sharesies’ brokerage and foreign exchange fees.


So in general:

  • The two ETFs deliver quite similar results for larger investment portfolios, particularly if you’re starting out with over $50,000 NZD invested in Foreign Investment Funds.
  • The Vanguard S&P 500 ETF delivers better results if you have a smaller investment portfolio and can apply the de minimis exemption in regards to tax. This means you only have to pay tax on the dividends, and for the S&P 500 the dividends should be relatively low.
  • However, in the very short-term (for 2-3 years) Smartshares is better as it takes a couple of years for Vanguard’s lower management fees (and sometimes favourable tax treatment) to offset the initial foreign exchange and brokerage costs. This should be no problem, as these S&P 500 ETFs are intended for long-term investment.

But while the assumptions I’ve made so far keep the above comparisons relatively simple, they are not perfect. The main limitations of the comparison are:

  • CV method – I assumed we made a constant 7% return every year. In reality you will get a higher return in some years, and a low or negative return on your investments in other years – in which case it could be beneficial to apply the CV method to calculate your tax liability for your FIFs. The CV method is not available for USF, making VOO more favourable in this instance.
  • Payment of tax and dividends – I assumed that the tax liability for both ETFs were paid out of the returns of the ETF (i.e. the capital gain/dividend). While this is true for USF, for VOO the taxes are paid as an out of pocket expense to the IRD every year. This means you’ll either have to put some cash aside, or sell some units of the ETF to pay for your tax liability.
  • Tax advice – I assumed that no accountant was used to help calculate and file the taxes. In reality an accountant may be required (which will cost you), particularly when dealing with the FIF tax rules associated with VOO.
  • InvestNow cash drag – I assumed that there is no additional cash drag from using the InvestNow platform. In reality InvestNow doesn’t offer fractional investment into ETFs (like Sharesies or Hatch), so any investment in USF will always result in some cash left over from your order (rather than getting invested into units of the ETF). The effect will be more drastic for smaller order sizes and this cash drag may impact returns, but can be mitigated by regularly investing the excess cash.
  • Changing assumptions and parameters – I assumed that all the assumptions and parameters I used remain the same throughout 10 years. Things like fees, tax rules, exchange rates can and do change over time, and would alter the results.

You can copy the spreadsheet I used to do the calculations here and play around with the numbers if you wish to do your own comparison.

Conclusion

Despite investors facing additional foreign exchange and brokerage costs to buy the Vanguard S&P 500 ETF, if you invest for a long enough period of time (2-3 years) these extra fees are often offset by Vanguard’s lower management fees compared with the Smartshares US 500 ETF. However, there is not a massive difference in results between the Smartshares and Vanguard products – perhaps small enough that it’s probably better to just pick the ETF you feel is better for you, rather than spending too much time on overanalysing the options (and perhaps not starting to invest at all). A lot can change in 10 years (such as fees or tax rules) that could totally flip which option is more favourable.

For me Smartshares is the more convenient product. Things like foreign exchange, dividend reinvestment, and most importantly tax are all taken care of me – the streamlined investment process, and having all my index fund investing on one platform (InvestNow) is worth more to me than any potential gains (probably a few hundred dollars over ten years) I could make by switching to the Vanguard equivalent. However, those who have already set up an account with Sharesies or Hatch to invest in other US shares and ETFs may find it less difficult to add Vanguard’s S&P 500 ETF to their portfolio.

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Disclaimer

The content of this article is based on my personal opinion and should not be considered financial advice. The information should never be used without first assessing your own personal and financial situation, and conducting your own research. You may wish to consult with an authorised financial adviser before making any investment decisions.