When building an investment portfolio, every investor must consider tax issues in advance, since an inefficient tax regime can result in very significant losses. The larger the portfolio value, the greater the impact of the tax regime. Investors always have several alternatives: trading independently through a brokerage account, packaging assets into an external investment fund or trust, or using active versus passive strategies. Let us examine, using the example of the IskraIndex Deposit+ Conservative and Balanced base strategies, how the tax regime affects the portfolio's net after-tax return.
Dividend Optimization
First of all, it should be noted that most ETFs in IskraIndex portfolios pay dividends, which are generally subject to a 30% U.S. withholding tax. There are various geographic investment structures where the investor's country of residence has a double taxation treaty with the U.S. In such cases, the dividend tax rate may be reduced to 15%. However, this is still a significant amount that is worth avoiding. This can be done in two ways. The first is to use alternative accumulating ETFs that do not pay out dividends. Such funds exist only outside the U.S. and trade on the LSE. In the absence of access to the LSE, there is a second method — selling the ETF the day before the ex-dividend date and buying it back the next day. This approach requires more portfolio attention, entails trading costs, and carries the risk of a dividend gap, which in bond funds is usually smaller than the dividend amount. Our calculations show that this method can reduce dividend-related losses to 5–10%, compared to the 30% tax.
The Math of Taxes
Let us further assume that the investor has chosen the optimal method for dividends, allowing them to avoid tax losses. Assume that the investor's tax regime imposes a 30% tax on capital gains.
Net after-tax return: 10.8 × (1 – 30%) = 7.6% per year, minus the Iskra Index fee (0.5%), which gives 7.1%. Over 10 years, the investor would have earned 99%.
Over 10 years, the investor would have earned (1 + 10.8% – 0.5%)^10 – 1 = 179%, of which after taxation they would be left with 117%.
The difference in return over 10 years is 18 percentage points, equivalent to 1.7% per year — that is exactly how much the investor would under-earn annually when trading through a brokerage account compared to an external fund. The problem is that this figure is substantially lower than the average expenses inside an external fund, even if the fund is set up for a single individual investor: typically, they amount to at least 2% per year of the client's assets. This is especially true if the investor's tax regime is significantly more favorable than the 30% capital gains tax rate.
Conclusion: Conservative portfolios are better managed independently through a brokerage account. Moreover, the investor's net return of 7+% is nearly three times higher than the deposit yield over the past 7 years and seven times higher than the return of global bond ETFs.
Net after-tax return: 15.9 × (1 – 30%) = 11.1% per year, minus the Iskra Index fee (0.5%), which gives 10.6%. Over 10 years, the investor would have earned 174%.
Over 10 years, the investor would have earned (1 + 15.9% – 0.5%)^10 – 1 = 319%, of which after taxation they would be left with 223%.
The difference in return over 10 years is 49 percentage points, equivalent to 4.1% per year — that is exactly how much the investor would under-earn annually when trading through a brokerage account compared to an external fund, whose annual costs would be significantly lower and fully justified for target return levels above 12–13% per annum. If the investor's tax rate is reduced to zero for long-term investments (5–10 years), the effect becomes even more pronounced.
Conclusion: Both balanced and more aggressive portfolios are significantly more effective when structured through an external investment fund.
Final Conclusion
It is hard to imagine that multi‑million‑dollar accounts, for which IskraIndex portfolios are designed, would operate without tax optimization through a simple brokerage account. Most likely, individuals with such assets already have the necessary infrastructure in place, including their own funds or trusts, to minimize taxes. If such infrastructure does not exist, IskraIndex can offer funds based on its own higher‑risk strategies (primarily the "Idea" line), which can be purchased directly through a brokerage account. The annual expenses of such funds may be up to 4% per year, but they would allow investors to avoid annual tax losses of up to 6% over a 10‑year horizon at target return rate 19% per annum.
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