Individual Stocks vs ETFs - Tax Implications

[brightman]

Hi there.

I've been looking into the difference between ETFs and individual stocks here in Ireland.

From my, albeit rudimentary, understanding, when individual stocks are sold you're liable to 33% CGT on any gains above the €1,270 allowance. With ETF's however, you're liable for 41% on any gains with no allowance and you're liable to deemed disposal whereby you'll be charged 41% on the gains after 8 years even if you haven't sold.

Assuming the above is correct, the question I have is, if I'm interested in tracking the S&P 500, what's stopping me from buying the stocks that make up the S&P 500 individually and saving myself 8% tax and avoiding the deemed disposal rule?

I'm not looking to fanatically follow the S&P 500 to a tee so even if you bought the top 50 (or 100 stocks) of the S&P 500 individually on a trading app, you'd be tracking the bulk. Sure it's up front work but once you've got your allotment it's just a case of logging into an app and buying more.

Am I missing something blatantly obvious? Fees per trade or something? From where I'm standing at the moment it feels like the ETF tax rate is a means of hoodwinking people into investing 'stress free' but at a higher rate of rate of tax.

Any and all insight would be greatly appreciated.

 

[kinzie]

@brightman Rebalancing!

If Apple slide, and you need to rebalance your portfolio to better track the index, then you will have to pay the tax (yes, it is 33%) on this gain.

This does not happen in ETFs.

Also, check out The Myth of the 30 Stock Portfolio

What if Stock number 51(or 101) becomes the largest stock in a couple of years. You will have missed out on this massive run (and gains).

 

[sponsachristi]

@brightman Nothing is stopping you!

Wha you need to be aware of is platform fees for trading, the time it will take you to keep track of 50 or 100 stocks, the S&P does not have a equal ratio of all shares.

Overall it is not realistic or sustainable to invest in them all individually, but technically you can!

 

[resjudicata]

@brightman Transactions fees, rebalancing and time and effort. It's not realistic for any retail investor.

 

[anro25]

@brightman First thing you are missing out is the trade fee per stock per month (assuming you buy stocks every month as regular saver), which will be more costly and harder to track for cost basis.

ETFs do track more than top 50 or top 100 stocks so the returns might be different.

Using Trade212 pie thing is an idea (I never tried but read it here) but buying 50 stocks each month will be costly. Let's say if you pay 1 euro per trade you will have 50 euro fee per month.

The only good side with this is, if you have losses from stocks you can offset it but if I am not mistaken, you can't offset your trade costs as expense for trading.

 

[brightman]

@anro25 The approach I was thinking is say I invest €300 a month, put €100 into 3 different stocks from the S&P 500 and then the following month put €100 into 3 different stocks up to, let's say, 50 stocks. Then you start over and put €100 into the first 3 stocks you chose.

Something like that, I'm just spitballing because as I said I'm not looking to track the S&P 500 exactly but rather to get all the big boys (especially those weighted higher) into my portfolio without having to pay an additional 8% tax for what, to my knowledge, amounts to tax for saving you the hassle of buying individually.

I hope that makes sense haha

 

[anro25]

@brightman The weight of the stocks do differ in ETFs, for example take a look at this ETF: https://www.ishares.com/uk/individu...fund?switchLocale=y&siteEntryPassthrough=true

So returns will be different to SP500 ETFs with your approach. Instead of calling it following SP500 you can simply say you will buy some blue chip stocks.

 

[brightman]

@anro25 Haha, buying some blue chips would have been a much easier way of putting this. Appreciate the help.

 

[orion3003]

@brightman in that case, why not set up a PIE in T212 for all the companies you want to invest in. Put in your 300 a month and it buys a proportionate share in each company. Rather than buying a few each month, buy a little of everything.

it'll smooth out pricing as well over the long term. you'll buy some when its cheap and some when its more expensive. you don't then really need to worry about thinking if the stock is cheap or expensive the month you look at it. set and forget

 

[resjudicata]

@anro25 Depends completely on the individual ETF what it tracks.

 

[coffeeandprayer]

@brightman ETFs are brilliant investment tools, but the punishing and overly complex taxation of them in Ireland really diminishes their attractiveness.

 

[haipule]

@brightman Nothing is stopping you.

You may be interested in stocks like BRK B which are a proxy for the SP500. Berkshire hold a number of stocks like Apple, Coca Cola, etc but is itself a stock.

 

[resjudicata]

@haipule BRK.B is not a proxy for the S&P 500 btw, and is not meant to be.

 

[haipule]

@resjudicata Fair enough, it is not a proxy. There is a correlation between them but it's not a substitute.

 

[torm3nted_soul]

@brightman Standard advice around here is that JAM is a reasonable approximation of S&P500 without having to buy 500 shares yourself

 

[orion3003]

@brightman so theres 500 stocks in the S&P 500. Buying them once (or many times) is time consuming and costly.

to properly mirror the index you need to know the weightings and to change your holdings as the rebalances happen (which will cause tax events (tax on gains, losses to carry over).

If you buy more than once you have all the costs again.

There is one or two ways around it (Albeit not 100% perfect).

You can just look at the top companies and only buy those - but potentially miss out on a new growing company

you can use a broker like Trading 212 where you can set up a Pie, making up the companies (or piggyback off somebody elses). You still need to rebalance from time to time, but its a lot simpler (one order to do it).