YOUR MONEY: Want to build an offshore portfolio? Here’s what you should know

What are the cost implications for investing in a locally listed offshore ETF, a foreign-listed ETF or directly in underlying offshore equities?

— Name withheld

Answer:

We need to discern between the three different options to compare costs.

Offshore equities: Where the investor tries to replicate an index, as ETFs do, he/she would need to buy several stocks. This will attract fees for each trade (buy) transaction. In addition, the investor would be limited by his/her foreign investment allowance by the Reserve Bank. Finally, the investor will need to translate his/her rands into the hard currency of the bourse where the equities are listed. This type of investing is the most expensive of the three discussed here.

Foreign-listed ETFs: These ETFs, listed on a foreign stock exchange, have the benefit of lower transaction fees, or investment charges, than buying offshore equities outright. However, the investor will still need to translate his/her rands into hard currency and invest within their foreign investment allowance. A benefit, especially over the longer term, comes from the way in which capital gains tax is calculated on the capital appreciation. Because the asset and its appreciation are priced in a hard currency, rather than in rands, capital gains will be calculated on the average exchange rate of the rand against the hard currency.

Locally listed offshore ETFs: The biggest benefit of these ETFs is that they’re not considered as part of an investor’s foreign investment allowance. In addition, the investment charges on local ETFs, whether they’re invested in domestic or foreign assets, are quite transparent and published on a regular basis by the management companies overseeing them. Investors are also more familiar with the transaction or brokerage fees charged by their local brokers. A small pitfall may be the effect of a weakening rand on the capital gains tax an investor should eventually pay. The rand value of capital appreciation, should the rand weaken, will be used to calculate capital gains, capturing the rand’s full movement rather than just the average exchange rate.

— Nerina Visser is director of etfSA

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