Last week I wrote an article comparing the after tax returns of the NZX50 relative to the after tax returns of the S & P 500 (U.S).
I was interested in finding out why so many fund managers in New Zealand overweight towards New Zealand shares. Obviously tax savings is the main reason, and the article concluded that investing in NZ funds provides a 1.68% head start for someone being taxed at 33%.
Which is great and provides a reason for over weighting towards New Zealand. But there’s a problem. The S & P 500 has outperformed the NZX50 by 2.16% per year over the last 21 years. Which more than makes up for the 1.68% tax difference.
So it seems many kiwis are taking on a lot of risk investing so much in a country that produces so little of the worlds economic productivity.
So today I thought I would run another comparison to see how much of a head start one form of investing provides over another. Investing in an international PIE fund vs investing in an international non PIE (FIF) fund.
Using the same 21 period of returns from January 2004 to January 2025, the S & P 500 produced annualised returns (including dividends) of 10.38%.
Below are the 21 year results of the after tax returns at different tax rates for both a PIE fund and a non PIE fund
S & P 500 21 year (Jan 2004 to Jan 2025) after tax returns at different tax rates for both a PIE fund and a non PIE fund
No difference on tax rates of 28% or less. If your income tax rate is 30%, you would be 0.11% a year better off in a non PIE fund. 0.26% a year better off at an income tax rate of 33%, and 0.56% a year better off with an income tax rate of 39%.
This is of course based on returns over a 21 year period between NZX50 and S & P 500. Moving forward who knows what the difference will be. But history does provide some insight into today’s decisions moving forward.
You would also want to take into account other factors when comparing a PIE fund and a non PIE fund. Such as fees of the funds. If you can find a lower charging equivalent fund in a non PIE wrapper, then that can offset some of the discrepancy. Or maybe your preferred fund is only available in a non PIE format. That is fine too.
Also note that we have only used the example of a FIF fund that pays tax using the FDR method. But you do have the ability to pay less tax in poorer performing years, which is a benefit of investing in FIF funds not to be excluded. So in the next article, we will introduce a hypothetical investor who switches between the FDR and CV methods of paying tax to see if that bridges the gap discovered today between a PIE fund and a non PIE fund.
For more on FDR and CF FIF tax, have a look at this resource page.
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The information contained on this site is the opinion of the individual author(s) based on their personal opinions, observation, research, and years of experience. The information offered by this website is general education only and is not meant to be taken as individualised financial advice, legal advice, tax advice, or any other kind of advice. You can read more of my disclaimer here