Ireland's Guide To Etf Investing: Getting Started

Exchange-traded funds (ETFs) are a popular investment choice in Ireland, particularly among young investors, due to their accessibility and low costs. ETFs are funds that follow the performance of an index, commodity, bond, or composition of products and are traded on stock exchanges. Ireland is a major hub for European-domiciled ETFs, with almost 70% of Europe's ETF market based in the country. However, investing in ETFs in Ireland comes with high taxes and complex tax reporting requirements. Before investing, it is essential to understand the different types of ETFs, such as stock index ETFs, currency ETFs, and sector ETFs, as well as the associated risks. Online platforms and brokers provide opportunities for investors to access a diverse range of ETFs, both local and global.

How to open an account to buy ETFs

To open an account to buy ETFs, you will need to open a brokerage account. This can be done online and many brokerages have no account minimums, transaction fees, or inactivity fees.

There are several types of brokerage accounts to choose from, including:

• Taxable: These are "regular" accounts without special tax advantages. They are ideal for goals that will occur before you reach the federal retirement age of 59 1/2. While there are no restrictions or penalties when you sell your investments, you will need to be aware of taxes. You will owe taxes anytime you sell investments for a gain or even when you receive dividend payments.
• Retirement: These are tax-advantaged retirement accounts like traditional and Roth IRAs that allow your investments to grow tax-deferred or even tax-free. However, due to these tax benefits, the IRS imposes special contribution limitations and withdrawal requirements. For example, you cannot contribute more than $6,000 per year ($7,000 if you're 50 or older), and you cannot access funds in your IRA until you're 59 1/2 without paying a 10% penalty, plus taxes on any money that hasn't been taxed before.
• 529: If you're planning to use ETFs to save for college, a 529 account is a good option as money held in a 529 grows tax-free and won't be taxed on withdrawal as long as it's used for qualified educational expenses.

When deciding where to open your brokerage account, consider the following:

• Fees: Look at how they charge for trading or maintenance. Many brokers now don't charge maintenance, administration, or stock trading fees, which is important because ETFs trade like stocks.
• Minimum deposit: Some brokers require a minimum deposit to open an account, but with ETFs, that minimum is generally only the cost of one share.
• Types of assets: Not all brokers allow you to purchase every type of investment, and if they do, they might not allow for fee-free trading.
• Customer service: Find out what type of help is offered and how responsive the brokerage is.
• Special features: Consider what other features the brokerage offers, such as access to automatic tax-loss harvesting or portfolio rebalancing.

How to buy an ETF you already hold units in

To buy an ETF you already hold units in, follow these steps:

• Log in to your brokerage account: Go to the trading section of your brokerage account. If you have any problems logging in, contact your broker's customer support team.
• Find the ETF you want to buy: The ETFs you currently hold will be listed on the trading page. To trade an ETF that you already hold, click the "Buy" button. This will enter the name of the ETF into the "ETF Name" field, and you can then choose the type of order you wish to place.
• Select the ETF you wish to buy: If you cannot find the ETF in the drop-down list, use the advanced search function to filter ETFs by their exchange, sector, industry, name, International Securities Identification Number (ISIN), or ticker.
• Place your order: Choose the type of order you want to place, such as a limit order or a market order. Specify the number of units you want to buy and the duration of your order.
• Review your order: Before placing your order, review the details to ensure that everything is correct, including the ticker symbol, order type, and number of shares.
• Confirm your trade: Once your order has been placed, you can view the status of your trade in the "My Orders" section of your brokerage account. You may also receive an email confirmation if you have signed up for this option.

By following these steps, you can easily purchase additional units of an ETF that you already hold, allowing you to increase your investment and potentially diversify your portfolio further.

How to find and buy a new ETF

• Open a brokerage account: You need a brokerage account to buy and sell securities like ETFs. Many brokers have no account minimums, transaction fees, or inactivity fees. Compare each broker's features, platform, and educational resources, especially if you're a new investor.
• Find and compare ETFs with screening tools: Most brokers offer screening tools to filter ETFs based on criteria such as asset type, geography, industry, trading performance, and fund provider. Criteria to consider include administrative expenses (expense ratios), commissions, volume, holdings, performance, and trading prices.
• Navigate to the "trading" section of your brokerage's website: Here, you can buy the ETF by entering its unique identifier (ticker symbol) and specifying the number of shares you wish to buy. You can also choose from different order types, such as market, limit, stop, or stop-limit orders.
• Review and execute your order: Before executing your order, double-check that all the information is correct, including the ticker symbol, order type, and the number of shares.
• Sit back and relax: Congratulations! You've bought your first ETF. These funds can form the basis of a well-diversified portfolio. You don't need to constantly check their performance, but you can access that information through your brokerage's website or by searching the ticker symbol online.

The risks of investing in ETFs

Like all investments, ETFs carry a certain level of risk. It's important to understand these risks before investing. Here are some of the key risks associated with investing in ETFs:

Capital Risk

All financial investments involve some level of risk. The value of an investment and the income from it can vary, and there is no guarantee that you will get back your initial investment.

Tax Risks

International taxes can impact your returns. Different ETFs may be taxed differently, and some may be subject to higher tax rates. It's important to research and understand the tax implications of any ETF you are considering investing in.

Currency Risks

ETFs are exposed to currency risks, especially international ETFs. Changes in exchange rates can impact the value of your investment.

Liquidity Risk

Liquidity refers to the ease with which an investment can be converted into cash without impacting its market price. ETFs with low liquidity may have higher trading costs and may be more difficult to buy or sell. To assess the liquidity of an ETF, investors can look at factors such as bid/ask spreads, trading volume, and how closely the ETF is trading to its net asset value.

Underlying Asset Risk

ETF investors are exposed to the risks associated with the underlying basket of investments. For example, a bond ETF may be exposed to credit, default, and interest rate risks. It's important to carefully review the prospectus of an ETF to understand the specific risks associated with the underlying assets.

Market Risk

The underlying assets of an ETF may fluctuate in value. ETFs that track a broad market index are generally less volatile than those that track a specific industry or sector. Investors should understand what the ETF is tracking and the associated risks.

Tracking Error

ETFs that track an index may not always deliver the exact same returns as the index due to factors such as management fees, tax treatment, and dividend timing. This is known as tracking error. Physical replication ETFs tend to have larger tracking errors compared to synthetic replication ETFs.

Counterparty Risk

Counterparty risk is associated with securities lending and synthetic replication. In securities lending, counterparty risk arises when holdings are lent to another investor. In synthetic replication, counterparty risk is present when an ETF tracks an index through swaps. Collateral requirements and collateralizing swap exposure can help mitigate this risk.

Closure Risk

ETF closures do happen, and when they do, managers incur capital gains, transaction expenses, and legal costs, which are ultimately passed on to investors. It's important to monitor the performance and stability of the ETF provider to mitigate this risk.

While investing in ETFs carries risks, understanding and carefully managing these risks can help investors make more informed decisions and potentially mitigate their impact. Diversification, research, and seeking professional financial advice are important tools for navigating the risks associated with ETF investing.

How to buy and sell ETFs

Before buying or selling ETFs, you'll need to open a brokerage account. You can choose between a taxable, retirement, 529, or custodial account, depending on your goals. For example, if you're saving for retirement, a tax-advantaged retirement account like a traditional IRA or Roth IRA is a good option.

Once you've chosen your account type, you'll need to research and select the ETFs you want to buy. You can use your brokerage's research tools or third-party databases like ETFdb.com to find ETFs that align with your financial goals and timeline.

When you're ready to buy, you'll need to fund your brokerage account and search for the ETF's ticker symbol. You can then enter the number of shares you want to buy and confirm the order.

If you already hold units in an ETF and want to trade it, simply click the "Buy" button on the trading page, choose the type of order you wish to place, and proceed from there.

To sell ETFs, you'll need to decide on an exit strategy. Consider ways to minimize capital gains taxes, such as through tax-loss harvesting. A financial advisor can help you determine the most efficient way to sell your shares.

It's important to remember that buying and selling ETFs is similar to trading stocks. You'll want to consider factors like volume, liquidity, and the bid/ask spread, which you can find in a Detailed Quote or an ETF Screener. ETFs are traded throughout the day at the current market price, and there is no minimum investment amount.

Frequently asked questions