In the previous blog post, we talked about the RSUs portion of an employee’s compensation. At first, they are granted to you, and when the time comes, they are vested: The shares are yours!
Once you can vest your shares, you need to pay income tax on them. For example, if you get 10 shares worth $100 each at the time of vesting, you need to pay 52% of their value to taxes (that number depends on where you live). This means that for those 10 shares, you need to pay $520 in taxes.
We compared three options to handle the stocks given to you by the company:
- Sell all when received: sell all 10 shares and take $480 home.
- Sell to cover taxes: sell 6 shares, invest 4 shares, and take $80 home.
- Keep all: add $520 to your brokerage account before the shares vest, and then invest 10 shares.
You can find the full comparison of these options here.
Today, we will explore a fourth option: sell all and direct the money towards an investment of your choice!
Remember Aoife? She works at a company called Nile, and as part of her compensation plan, she received 20 RSUs in 2020 that were vested throughout the years. Somewhere after January 2022, her company did a 1-to-20 split of stocks, so the original 4 shares vesting became 80 smaller shares.
In today’s blog post, I’ll present the profits that Aoife would’ve gained if she were to sell the RSUs and invest the extra income in S&P 500 ETFs and sell in January 2025. Aoife might not be real, but the numbers are!
Before we pull out the calculators, we need to review some popular terms from the investment world.
S&P 500
The Standard and Poor’s 500, or simply the S&P 500, is a stock market index tracking the stock performance of 500 leading companies listed on stock exchanges in the United States. This is one of the first terms you hear when you start looking into investments because the funds tracking it are considered to be a beginner-friendly, safe option due to its broader scope.
ETFs
An ETF, or exchange-traded fund (ETF), is an investment fund that allows investors to purchase a variety of different stocks and/or bonds at once. In our case, our ETF is tracking the S&P 500 index. Like with other competitive markets, there are several ETF providers you can choose from.
In the screenshot below, I attached the graphs of 4 different ETFs tracking the S&P 500. You can see they have similar trends, meaning they are all tracking the index pretty accurately! On the left, I have listed the top 8 companies, including the weight in %, represented in the Vanguard S&P 500 ETF.
To explore this new scenario, Aoife will cash out her RSUs and invest that money in the S&P 500 ETF.
Note that there are three important differences between investing in the S&P 500 ETF shares and investing in Nile shares:
- The S&P 500 ETF holds multiple stocks: Nile is one of those 500 companies, representing ~3.85% of those assets. So yes, she is selling Nile stocks and later purchasing some Nile stocks.
- You can purchase fractional ETF shares. In the previous blog post, when Aoife was selling to cover taxes, she was sometimes left with cash. That’s because you can’t buy a fraction of a stock. But with ETFs, you don’t need to reach the whole value of a share to purchase!
- If you couldn’t tell by her name, Aoife is an Irish resident, and therefore, her ETF’s capital gain is taxed at 41%, unlike the 33% that stocks are taxed at. We will calculate that into the formula.
Before we start, note that we are comparing stock profit to ETF profit. Meaning, in a normal setting, Aoife would’ve invested all the cash received from selling the RSUs. For our experiment, we will only invest the money that was invested in the stocks, and any leftover cash (that didn’t accumulate to a full stock price) won’t be invested in ETFs either.
Now we can start calculating 😀
Let’s look at the S&P 500 index in the last 5 years (link):
The table on the right shows us the amount of money invested in Nile shares by vesting period.
- January 2021: Aoife got her first share! But she had to sell it to cover taxes. As mentioned earlier, this means we won’t be investing in any ETFs this time.
- January 2022: 1 Share vested, worth $3240, so we put $3240 in our ETF!
- July 2022: 38 shares (post 1-to-20 share split) worth $110 each, meaning $4180 goes to ETFs!
- January 2023: 38 shares worth $86 each, meaning $3238 goes to ETFs!
- July 2023: 38 shares worth $130 each, meaning $4940 goes to ETFs!
- January 2024: 38 shares worth $145 each, meaning $3800 goes to ETFs!
- January 2025: Selling the ETF shares. But how much did Aoife gain?
We will calculate the Capital Gain from each batch of purchase:
Unlike stocks, because we buy fractional ETF shares, you can’t just multiply the number of shares by the delta between the buy and sell values. Instead, I used a different method: In the link I shared earlier, you can get the percentage of value difference in a certain period.
For example, from January 2022 to January 2025, there was a 27% increase in value. This means the capital gain was 3240*0.27= $874.8. Now, because the capital gain tax in Ireland is 41%, Aoife’s profit is 874.8*0.59= $516.1.
Now it’s time to compare! If Aoife were to take the stock route, she would’ve made $33942! This number is a bit lower than the one presented in the previous blog post, because this does not include the leftover cash from covering taxes in any of the vestings.
If Aoife were to invest her RSUs money in an ETF, she would’ve made $25878! This is a $8064 difference!!
There are two reasons for this big gap:
First of all, the tax on ETFs is 8% more than on stocks. Second, the S&P 500 tracks 500 companies, so it’s more stable than an individual stock. Some shares go up more, some go down, and they balance themselves. The value of the ETF share increased by 27–55%, while the individual stock’s value fluctuated between 44%-172%! Of course, this is nice when you buy the share at $86 and sell at $235, but not so much when it’s the other way around.
As I concluded in the previous blog post, the stock market is kind of a gamble. I once heard some advice: “Don’t invest money you are not willing to lose”. At first I didn’t get it — I mind every money loss! But after a while, I understood: They mean you shouldn’t invest money you can’t afford to lose. So it shouldn’t be any money for a nearby purpose: emergency fund, vacation, wedding, house, etc. Be responsible!
*This is not financial advice*
