A Beginner's Guide To Investing In European Etfs

Exchange-traded funds (ETFs) are an excellent way to invest passively in various stock markets and assets. If you're looking to invest in ETFs from Europe, it's important to be well-informed.

Here's a step-by-step guide to investing in European ETFs:

1. Choose an ETF: You can pick ETFs that track European markets, or look beyond Europe to the UK, US, emerging markets like China, or even a global index fund. The right ETF for you will depend on your individual investing strategy and goals.

2. Select a broker: A broker is a platform that allows you to buy and sell ETF shares. Not all European brokerages will offer every ETF on the market, so once you've chosen your ETF, find a European share dealing platform that gives you access to it. It's worth considering the fees charged by the platform, as ETFs are typically low-cost.

3. Place a buy order: Find the ETF within your chosen broker and place a buy order.

There are a few things to keep in mind when choosing an ETF:

- Accumulating vs distributing funds: Accumulating funds automatically reinvest dividends, while distributing funds pay them out as cash. The right type of fund depends on your country of residence and tax situation.

- UCITS legislation: All ETFs available in Europe must comply with the UCITS (undertaking for collective investment in transferable securities) regulatory framework, which includes providing investors with a Key Information Document (KID) in the native language of each country.

- TER (total expense ratios): ETFs with lower TERs are generally preferable.

Happy investing!

Choose a broker

A broker is a platform that allows you to buy and sell shares of ETFs and acts as an intermediary between the investor and the stock exchange. Not all European brokerages will give you access to every ETF on the market, so once you’ve decided on the ETF you want to invest in, you need to find a share dealing platform in Europe that gives you access to the particular ETFs you want.

It is also worth considering the fees charged by the broker, as ETFs are low-cost, so you don't want to end up paying high share dealing or platform fees. Here are some of the best ETF brokers in Europe:

• Interactive Brokers
• DeGiro
• Trading 212
• EToro
• Fineco
• XTB
• Scalable Capital

You will also need to consider the following:

• The number of ETFs you will get access to
• Regulatory bodies that supervise the broker
• Whether the broker is user-friendly and has a streamlined app
• The safety record of the broker

Select a broad market index

A broad market index is an excellent way to gain exposure to the entire European stock market. This can be done at a low cost by using ETFs. Currently, there are 25 ETFs available that track broadly diversified indices. The total expense ratio (TER) of these ETFs is between 0.05% p.a. and 0.30% p.a.

When selecting a broad market index, it is important to consider your investment goals and risk tolerance. Here are some indices to consider:

• FTSE Developed Europe Index: This index tracks large and mid-cap stocks from developed countries in Europe.
• MSCI Europe Index: The MSCI Europe index follows the leading stocks from 15 European industrial countries.
• STOXX® Europe 600 Index: This index tracks the 600 largest European companies.
• Solactive GBS Developed Markets Europe Large & Mid Cap Index: Tracks large and mid-cap securities from European countries.

When choosing an ETF that tracks one of these indices, be sure to research the underlying holdings and consider the concentration of countries, companies, and sectors. You can find this information in the index factsheets.

Additionally, you can use an ETF screener to explore other Europe ETFs that may exclude single countries or pursue specific equity strategies, such as socially responsible (SRI) ETFs, European dividend ETFs, European mid-cap ETFs, and European small-cap ETFs.

Understand the difference between index funds and ETFs

Understanding the Difference Between Index Funds and ETFs

Index funds and exchange-traded funds (ETFs) are excellent investment vehicles for beginners and experts alike, but there are some differences to note. Here's a detailed comparison to help you understand the key distinctions between the two:

Trading Mechanism and Flexibility:

• Index Funds: These are typically bought and sold directly from the fund company at the end of the trading day, based on the fund's net asset value (NAV). The price is determined once daily after the market closes.
• ETFs: Similar to stocks, ETFs are traded on stock exchanges throughout the day, and their prices fluctuate based on supply and demand. They offer more flexibility in terms of trading, allowing investors to buy and sell during market hours.

Minimum Investment:

• Index Funds: Often come with minimum investment requirements, which can vary and sometimes be quite high. This can be a barrier for investors with a small amount of capital.
• ETFs: Generally do not have minimum investment requirements. You can purchase as little as one share or even fractional shares, making them more accessible to a wider range of investors.

Taxation:

• Index Funds: May incur capital gains taxes when the fund manager sells holdings to meet redemptions, which can result in a tax liability for investors even if they haven't sold their shares.
• ETFs: Tend to be more tax-efficient due to their structure. They use an "in-kind" creation and redemption process, minimising capital gains distributions and reducing potential tax liabilities for investors.

Fees and Costs:

• Index Funds: Shareholder transaction costs are typically absent, and management fees tend to be lower for index funds. However, brokers may charge sales commissions, including front-end or back-end load fees, which can be expensive.
• ETFs: Management fees and expense ratios tend to be lower for ETFs. While some brokers may charge trading commissions for ETF trades, many offer commission-free options. The bid-ask spread is an additional cost incurred when buying ETFs, but it is usually small for high-volume, broad-market ETFs.

Liquidity:

• Index Funds: As they are bought and sold at the end of the trading day, index funds have less liquidity compared to ETFs.
• ETFs: With the ability to trade throughout the day, ETFs offer greater liquidity.

Returns:

• Similarities: Both index funds and ETFs aim to replicate the performance of their benchmark index, resulting in similar returns over the long term.
• Differences: ETFs may have a slight advantage due to their tax efficiency, potentially leading to fewer capital gains distributions.

In summary, both index funds and ETFs provide investors with diversified exposure to the market at low costs. The choice between the two depends on factors such as investment goals, trading preferences, tax considerations, and the availability of investment options.

Consider the pros and cons of investing in index funds and ETFs

Pros of Investing in Index Funds and ETFs:

• They are a low-cost way to invest, providing better returns than most fund managers.
• They help investors achieve their goals more consistently.
• They are passively managed, meaning they have lower fees than actively managed funds.
• They are more tax-efficient.
• They offer instant diversification.
• They are backed by the UCITS regulatory framework.
• They are easy to buy and sell.
• They are highly liquid.
• They are more accessible than index funds, which can only be bought directly from the provider.
• They are more flexible than index funds, which can only be bought and sold at the end of the trading day.

Cons of Investing in Index Funds and ETFs:

• ETFs do not provide direct access to US ETFs.
• ETFs track the market, so there is little chance of beating the market.
• Most ETFs are market-cap-weighted, so the bulk of your investment goes to the biggest holdings.
• Index funds are only available to UK-based investors.
• Index funds and ETFs might have lower dividend yields than individual stocks.
• ETFs might have higher costs than investing in a specific stock.
• ETFs might have a wide bid/ask spread, which could result in a better price if you invest in the actual stocks.
• Index funds and ETFs might not provide as much diversification as investing in individual stocks, particularly for mid- and small-cap companies.
• Intraday pricing of ETFs might cause unwise trading.

Decide between accumulating and distributing funds

When deciding between accumulating and distributing funds, it's important to understand the key differences between the two. Here are some key points to consider:

Accumulating Funds:

• Any income or dividends from these funds are automatically reinvested back into the fund, increasing its value over time.
• Accumulating funds are often referred to as "Acc." or "Growth Funds" and are ideal for those who want their investments to grow over time without active management.
• Accumulating funds are more convenient as they don't require any action from the investor to reinvest dividends.
• In some countries, accumulating funds may be more tax-efficient than distributing funds, as taxes are only paid on capital gains and not on dividends reinvested by the fund.
• Accumulating funds may have lower fees than distributing funds, depending on the provider.

Distributing Funds:

• Distributing funds, also known as "Income Funds," distribute dividends directly to shareholders.
• These funds are ideal for those who want steady passive income and the flexibility to use the dividends as they please.
• Distributing funds can be more convenient from a tax perspective in certain countries, as it may be easier to declare dividends received directly.
• Distributing funds can be useful for rebalancing your portfolio, as the extra cash from dividends can be invested in underperforming funds.

Country-Specific Considerations:

• Switzerland: Accumulating and distributing funds are taxed the same, but it may be easier to declare dividends from distributing funds.
• United States: There is no difference in taxation between the two, as the IRS withholds all dividends at the source.
• Belgium: Accumulating funds are more tax-efficient due to taxes on dividends for distributing funds.
• Germany: Distributing funds are more tax-efficient.
• United Kingdom: It is generally easier to work with distributing funds.

When deciding between accumulating and distributing European ETFs, it's important to consider your investment goals, tax implications, and the level of convenience you prefer. Both options have their advantages, and the right choice depends on your individual circumstances and strategy.

Frequently asked questions