Saturday, 11 June 2016

SCB: What to do with Foreign Shares?

What do we do with our SCB Foreign Shares?

Answer: Keep the forex inside SCB to avoid the forex loss, concentrate all your holdings into 1 dividend reinvesting ETF, hope for better deal from SCB.

I like blogposts that put the answer at the start in case I don't want to read the whole post.

If you angrily sell all your foreign shares in SCB, you get hit by the forex penalty. If you keep too many separate counters, you will get hit by multiple minimum commissions when you want to sell.

So what I am doing is to identify 1 x US$ dividend reinvesting ETF, and 1 x GBP dividend reinvesting ETF. I sell all my other foreign ETFs and use the proceeds to buy only those 2  ETFs.

At worst, if I need to sell it once the min commission takes effect, I have to pay US$10 / GBP10.

But lets be positive and look on the bright side. I am picking big cap ETFs with relatively low volatility, so I should be able to hold them for a very long time until retirement and they may well have doubled or tripled in value by them (power of dividend reinvesting). Then on retirement, I incur a one-time cost to sell and change to S$ and withdraw it.

If I were an bigger optimist, I could hope that SCB comes up with a better deal somewhere down the road (eg: $5 min comm instead of $10) because technology should make trading cheaper rather than more expensive. Who knows whether the TPP (Trans Pacific thingy) will result in more competition from foreign brokers and lower prices.

On the other hand, people say SCB can introduce custodian fee for foreign shares. But I already have my exit strategy, since I only have 2 ETFs, the commission I have to pay is much less (vs my earlier pokemon collection of 8 ETFs [yikes])

Its ok to sometimes take the long view, but make sure all your eggs are not all in the SCB basket :)

Explanation: Why Dividend Reinvesting ETFs?

One of the attractions of no minimum commission is that it was easy to reinvest the small dividends I received from my ETFs. Most ETFs pay quarterly dividends so it was good that we could reinvest dividends simply by buying 1 or 2 shares (probably loss-making for SCB since they have to print contract note with colour letterhead, put in envelope, and post it to us).

Minimum commission makes it almost impossible to reinvest dividends. That means either leave the forex in the account earning hardly any interest, or changing the foreign currency to S$ and get hit by the bid-offer spread.

Because of this, you should not hold any ETF that declares dividends in a foreign currency in SCB.

More details

This month, I have identified the 2 ETFs I want to keep in SCB and hopefully only withdraw them on retirement:

US$ IWDA - World ETF, part of Shiny Thing's recommended portfolio.
XESC - Euro Stoxx 50 ETF, because the Euro Stoxx 50 has a decent dividend yield of 3% (which will be reinvested), and the companies are big and mostly well-known international giants.

My SCB portfolio is mainly GBP, so most of the selling was GBP denominated ETFs. I started slowly selling my other ETFs and got a little bit lucky that after I sold the ETFs, the prices of shares dropped by 1-2%, so I could buy XESC a little cheaper and help to offset the 0.25% sell and 0.25% buy commissions that I was resigned to paying...

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