The Northern Trust index funds<\/a> are quite popular with Dutch investors.<\/p>\n
Due to their low costs, tax optimization, and availability at the local banks, many investors from the Netherlands prefer the Northern Trust (NT) funds over ETFs<\/a>.<\/p>\n
In this post, I’ll compare the total cost of a portfolio of NT funds with the alternatives.<\/p>\n
The Northern Trust Funds aren’t available directly to retail investors.<\/p>\n
However, Dutch residents have an easy way to invest in these funds through the three major banks (ING, ABN Amro, Rabobank).<\/p>\n
Thus, the total cost<\/a> of investing in Northern Trust index funds can’t be analyzed in isolation. We must consider\u00a0both\u00a0<\/strong>the costs of the funds<\/em>\u00a0and\u00a0<\/strong>the costs charged by the banks<\/em>.<\/p>\n
All Dutch banks charge fees as a percentage of an investor’s portfolio. I already did the comparison and will publish it in a separate post.<\/p>\n
In summary, if your portfolio is below \u20ac265k, ABN Amro is the cheapest option. Thus, I’ll use it for the calculations below.<\/p>\n
For the purposes of this post, I’ll assume a \u20ac200k portfolio, as most beginners’ portfolios would be below this amount.<\/p>\n
Why would anyone invest in Northern Trust index funds, if there are extra costs by the banks?<\/p>\n
The main selling point, and the reason why they gained popularity, is because of their tax optimization.<\/p>\n
Basically, you can recover the dividend leakage<\/a>. Make sure to read my post on it if you don’t know what it means.<\/p>\n
Before we can make a comparison of the total cost, we need comparable portfolios.<\/p>\n
The go-to approach for Dutch investors is replicating VWRL\/VWCE<\/a>. As you probably already know, $VWCE is a globally diversified ETF with the following regional distribution:<\/p>\n
Some investors also prefer to include the Northern Trust World Small Cap ESG Low Carbon fund (ISIN: NL0013552078). But for simplicity, we’ll focus on a two-fund portfolio.<\/p>\n
The total expense ratio<\/a> of $VWCE is 0.22%.<\/p>\n
On a portfolio of \u20ac200k, this is \u20ac440<\/strong>.<\/p>\n
The other cost is more implicit – the dividend leakage<\/a>. As mentioned above, this is an amount that “leaks” when the companies pay out dividends to the fund.<\/p>\n
The current dividend yield of the constituent companies is around 1.6%. This can be seen in the payout details of $VWCE’s distributing equivalent, $VWRL<\/a>. Keep in mind that this amount varies based on the share price, but 1.6% is a good representation of the mid-term average.<\/p>\n
Dividend leak means that around 10-15% of the dividend amount would be lost in taxes. The exact number depends on the internal allocation<\/a> of the fund and<\/strong> the treatment of dividend across countries. I’ll use 12.5% for the calculation, as a good average.<\/p>\n
On a portfolio of \u20ac200k, this amounts to \u20ac400<\/strong>.<\/p>\n
So the real <\/strong>total cost of $VWCE<\/a> would be the TER + dividend leak. There are no additional costs, as Dutch investors can purchase this ETF at DeGiro, where it’s a part of the Core Selection<\/a> (i.e. ETFs without transaction costs).<\/p>\n
The total annual cost is the sum of the:<\/p>\n
So the total cost<\/a> of a $200k portfolio invested in $VWCE is around \u20ac840.<\/p>\n
Total Cost: \u20ac840.<\/strong><\/p>\n
Percentage-wise: 0.42%.<\/strong><\/p>\n
As mentioned earlier, Dutch banks charge a fee as a percentage of the investor’s portfolio.<\/p>\n
ABN Amro’s costs are as follows:<\/p>\n
From\u00a0ABN Amro\u2019s website<\/a>:<\/p>\n
Total Bank Cost: \u20ac320<\/strong><\/p>\n
Northern Trust World<\/strong> has a TER of 0.15%. Northern Trust Emerging Markets<\/strong>\u00a0has a TER of 0.25%.<\/p>\n
Given their respective allocations (89% and 11%), the total expense ratio of this portfolio would be:
Total Fund Cost: 0.16%<\/strong><\/p>\n
On a portfolio of \u20ac200k, this would be: \u20ac320<\/strong>.<\/p>\n
All costs associated with owning a Northern Trust index fund with ABN are:<\/p>\n
The total annual cost<\/a> of a $200k portfolio invested in the Northern Trust funds is around \u20ac640.<\/p>\n
Total Cost: \u20ac640.<\/strong><\/p>\n
Percentage-wise: 0.32%.<\/strong><\/p>\n
Investing in NT Funds is cheaper than $VWCE.<\/strong><\/p>\n
Even after the costs from the banks it, comes down to 0.32% vs 0.42%.<\/p>\n
And the biggest contributor to this is the recovery of the dividend leak<\/a>.<\/p>\n
The appeal of $VWCE comes from the fact that it’s the usual candidate for a one-fund portfolio.<\/p>\n
So if the alternative is managing a portfolio of multiple funds, we need to price this in.<\/p>\n
For example, in my post\u00a0Replicating VWCE<\/a><\/strong>, I gave an example portfolio that has\u00a0the exact\u00a0<\/strong>same allocation as $VWCE, but is twice as cheap. I also give ideas on how to decrease the TER<\/a> even further, for some sacrifices in diversification. And this can get the expense even lower than those of the Northern Trust Funds.<\/p>\n
Also, if an investor isn’t married with the internal allocation of $VWCE, he can check the examples at the Core Portfolio for EU Investors<\/strong><\/a> – which lower the costs even further. Most such portfolios (i.e. those that have $CSPX as a core component<\/a>) are cheaper alternatives even after the dividend leakage.<\/p>\n
The dividend yield is not fixed.<\/strong><\/p>\n
It is basically the amount paid out per share divided by the price per share.<\/p>\n
So, if a company’s share price falls, the dividend yield<\/a> would be higher. If a company’s share price rises, the dividend yield would be lower. The latter would make the costs of ETFs more favorable.<\/p>\n
So realistically:<\/p>\n
It depends.<\/strong><\/p>\n
VWCE\/VWRL is not the only alternative to the NT Funds.<\/p>\n
Actually, I think that investing in both $VWCE and\u00a0the Northern Trust Funds is unnecessarily expensive and should be avoided.<\/strong><\/p>\n
Check out my Core Portfolio<\/a> recommendations to get some preferable ideas.<\/p>\n
Every portfolio deserves a dedicated evaluation.<\/strong><\/p>\n
Have you thought if index funds<\/a> are a better fit for your portfolio than exchange traded funds<\/a>?<\/p>\n
What did you end up with?<\/p>\n
Let me know in the comments below!<\/p>\n
For more thorough posts on investing from Europe, visit: EU Investors Handbook<\/strong><\/a>.<\/em><\/p>\n
For a comprehensive, beginner-friendly, and free resource<\/strong> on stock market investing, visit: <\/em>How to Start Investing: A Complete Beginner Series<\/em><\/a>.<\/strong><\/p>\n