You can now buy London Stock Exchange ETFs on our iFAST platforms!

• The London Stock Exchange (LSE) is the primary stock exchange of the United Kingdom and one of the largest equity markets in all of Europe, with more than 1,500 ETFs listed on it.

• With regards to ETFs that are listed on the LSE, investors have the option to select between an accumulating (ACC) or distributing (Dist) share classes. 

• Singapore investors can potentially save more by paying less dividend withholding tax on LSE listed ETFs, as compared to ETFs listed on the US exchange, which would in turn increase their total returns over the long run.

• Kickstart your investment journey by starting a Regular Savings Plan (RSP) with our specially curated list of LSE ETFs!

What is the London Stock Exchange

Many investors are familiar with the New York Stock Exchange (NYSE), Nasdaq Stock Market (NASDAQ), Stock Exchange of Hong Kong (HKEX) and our local Singapore Exchange (SGX), but fewer investors are familiar with the London Stock Exchange (LSE). So, what exactly is the LSE?

The LSE is the primary stock exchange of the United Kingdom and one of the largest equity markets in all of Europe, with more than 1,500 ETFs listed on it. As of 27 October 2023, the total market capitalisation of all securities listed on the LSE amounts to roughly GBP 2.72 trillion. Some of the largest publicly listed companies include Shell, AstraZeneca and HSBC.

Table 1: Top 10 companies listed on LSE

Trading hours wise, the LSE is open from Monday to Friday, from 3pm to 11.30pm (SGT, GMT+8) during summer time (last Sunday in March to last Sunday in October) and from 4pm to 12.30am (SGT, GMT+8) during winter time (last Sunday in October to last Sunday in March) every year.

To get to know this stock exchange better, we will be highlighting some of the benefits of investing in LSE ETFs, before highlighting some of the ETFs which we have selected to kickstart your Regular Savings Plan (RSP) journey.

Availability of accumulating ETFs is a unique feature of LSE 

Did you know that there are accumulating ETFs found on the LSE? 

So, what exactly are accumulating (Acc) ETFs?  Essentially, accumulating ETFs are ones that do not pay out dividends received from its underlying holdings to investors. Instead, it automatically reinvests these dividends into its portfolio to increase the Net Asset Value (NAV) of the ETF. As a result, each share of the ETF is now worth more than before, and this translates into capital gains for investors, assuming that the value of their initial investment does not decline. 

On the other hand, a distributing (Dist) ETF is an ETF that pays out the dividends it receives from its underlying holdings to investors. Investors will then receive these dividends in the form of cash in their respective brokerage account.

For investors who wish to reinvest their dividends, they can opt for an accumulating ETF, which would save them the trouble of executing each re-investment manually, and also cut down on their transaction fees, leading to higher overall returns.

Due to regulations, there are no accumulating ETFs on the US exchanges, as US listed ETFs are required to distribute at least 90% of its income to shareholders. Therefore, investors who wish to purchase accumulating ETFs would have to opt for products listed on the LSE. 

Lower withholding tax on dividends for Singaporeans 

Another benefit for Singaporean investors who wish to invest in LSE ETFs would be the lower withholding tax on dividends. For US listed ETFs, non-US resident investors would have to pay a 30% withholding tax on their dividends. This means that if a company declares a dividend of USD 100, investors will only receive USD 70 after subtracting the withholding tax.

However, for Ireland domiciled ETFs listed on the LSE, Singapore investors will only be taxed at 15%, instead of 30% due to a tax treaty between Ireland and the US. Therefore, using a similar example from above, if a company declares a dividend of USD 100, the investor will receive USD 85 instead, which is 21.4% more than the USD 70 if he or she purchased a US-domiciled ETF. 

Even though the difference in absolute amount may seem small at first glance, higher dividend withholding taxes will affect your total returns over time, and the difference would be more glaring as the size of your investment portfolio grows. Therefore, for investors who wish to save on paying taxes on dividends, they should opt for ETFs listed on the LSE instead of those listed on US exchanges. This strategy can be especially useful when investing in fixed income ETFs, where the majority of returns usually come in the form of dividends. 

How paying lower taxes on dividends can affect your returns in the long term

To illustrate the point, let us use two examples, with ETF A listed on the NYSE and ETF B listed on the LSE.

For ETF A, we assume a capital growth rate of 5%, an expense ratio of 0.1% with a dividend yield of 5% per annum. 

For ETF B, we assume the same capital growth at 5%, a higher expense ratio at 0.3% and the same dividend yield at 5% per annum. 

Assuming that a Singaporean invests USD 100,000 into each ETF, how would his or her returns differ after ten years? Remember that the investor would have to pay a dividend tax of 30% for US-domiciled ETF listed on the US exchanges but only taxed at 15% for Ireland-domiciled ETFs listed on the LSE.

Looking at this example below (Table 2), assuming all else being equal and that dividends are re-invested at the end of each year, the LSE ETF would produce a much better total return on investment over the long run, despite having a higher expense ratio.

This goes to show that the power of compounding really makes wonders and thus investors who wish to automatically re-invest their dividends can opt for an accumulating ETF listed on the LSE.

Table 2: Paying lower taxes on dividends can significantly increase returns over the long run