Buying ETFs? 2 Tax-Free Ones to Consider Investing In

London stocks ETFs

Tim Phillips

June 29, 2022

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If we’re thinking about where to invest in a highly uncertain market, then a great default option for a lot of investors should be exchange-traded funds (ETFs).

ETFs offer up many advantages for investors, both for beginners and seasoned pros. At the high level, though, they give investors instant exposure to a diversified market index at an ultra-low fee.

While we typically think of the S&P 500 Index in the US as the “go-to” index that an ETF should track, owning ETFs that have exposure to other global stock markets is also wise from a diversification standpoint.

Likewise, investing in the UK market – as I’ve previously highlighted – also has many advantages versus a growth market like the US.

One of these is that ETFs listed in London offer up a lower withholding tax rate for US-focused ETFs. However, more broadly, the UK imposes a zero rate dividend tax on UK stocks and UK-focused ETFs.

With that, here are two FTSE 100-focused ETFs that investors can consider buying and holding.

1. iShares Core FTSE 100 UCITS ETF

For investors starting out in the UK, the FTSE 100 Index is the UK equivalent of the S&P 500 Index.

It has the largest companies listed in the UK and tends to tilt towards “value” with oil & gas companies, banks, and consumer staples firms making up a large part of the index.

The iShares Core FTSE 100 UCITS ETF (LSE: ISF) offers investors great access to this theme, all at a super low cost of just 0.07%.

The largest holdings aim to reflect the FTSE 100 Index itself, with AstraZeneca plc (LSE: AZN), at 8.9%, Shell plc (LSE: SHEL), at 8.3%, and HSBC Holdings plc (LSE: HSBA), at 5.7%, the top three holdings of the ETF.

Consumer staples make up 18.4% of the ETF while Financials takes up 17.5% and Healthcare at 14.3%. Meanwhile, companies in the Information Technology sector make up just 1.1% of the ETF’s holdings.

The ETF pays out a quarterly dividend and is currently offering investors a 12-month trailing dividend yield of 3.8%.

It currently trades at a share price of £7.14 (S$12.08) and, with the ability for investors to buy single shares on the London Stock Exchange, the ETF is very affordable no matter how much you want to invest.

2. Vanguard FTSE 100 UCITS ETF

In a nearly identical offering, the Vanguard FTSE 100 UCITS ETF (LSE: VUKE) gives investors another option to tap into the UK stock market.

Its top three holdings are the same as the iShares ETF and in spots four, five and six are Unilever plc (LSE: ULVR), GSK plc (LSE: GSK), and Diageo plc (LSE: DGE).

The Vanguard ETF also happens to have a slightly higher total expense ratio (TER) of 0.09% versus the iShares offering.

It’s worth noting that the Vanguard FTSE 100 ETF has assets under management (AUM) of £4 billion while the iShares FTSE 100 ETF has AUM of over £10 billion.

That may give the iShares offering the edge in terms of liquidity.

In a similar vein, the Vanguard ETF distributes dividends every quarter but yields 3.4% (as of 31 May 2022). Its shares currently trade for around £31.80.

Look to diversify globally

When we think about diversifying into markets we may know less about, then investing through an ETF tends to be the best option.

While the UK has a lot less exposure to the technology sector, that may not be a bad thing if you hold a lot of “growth” and tech stocks in the US.

As an index, the FTSE 100 has also easily outperformed the S&P 500 Index so far this year as many of the businesses in the index pay out dividends and are more exposed to the energy sector – which has done well so far in 2022.

On top of that, with a zero dividend tax, investors can easily tap into the UK market (and generate a passive income) with these two solid ETFs.

Disclaimer: ProsperUs Head of Content & Investment Lead Tim Phillips doesn’t own shares of any companies mentioned.

About the Author: Tim Phillips

Tim, based in Singapore but from Hong Kong, caught the investing bug as a teenager and is a passionate advocate of responsible long-term investing as a great way to build wealth. He has worked in various content roles at Schroders and the Motley Fool, with a focus on Asian stocks, but believes in buying great businesses – wherever they may be. He is also a certified SGX Academy Trainer. In his spare time, Tim enjoys running after his two young sons, playing football and practicing yoga.