A European's Guide To Us Etf Investing

Investing in US-domiciled exchange-traded funds (ETFs) from Europe can be difficult due to regulations. Since 2018, EU rules have required investment providers to supply retail investors with a 'key information document' (KID) to help them understand the product they are buying. However, US ETFs do not provide such documents, which restricts Europeans' ability to invest in them. Despite this, there are still ways for Europeans to legally invest in US ETFs, such as using a non-European broker or purchasing ETFs indirectly through options.

Open a brokerage account with a non-European address

To invest in US-domiciled ETFs as a European resident, one option is to open a brokerage account with a non-European address. This is because the EU MiFiD regulation prohibits brokerage firms from selling funds to European retail investors that do not provide certain regulatory documents, such as a Key Information Document (KID). By opening an account with a non-European address, you can circumvent this regulation.

One of the easiest ways to do this is by opening an Interactive Brokers account with a non-EU address. If you have a US address, you can open an Interactive Brokers Lite account. This allows you to invest in US-ETFs, which would otherwise be prohibited under EU regulations.

It is important to note that this method may not be suitable for everyone, and there are other ways to invest in US-ETFs as a European resident. Additionally, regulations and offerings may change over time, so it is essential to stay informed about the latest developments.

If you do not have a non-European address, there are other options available to you. For example, you can open an account with a brokerage firm that operates within Europe but still offers services to European clients, such as Tradestation and Tastyworks. These firms are based in the US and do not adhere to EU regulations, allowing EU customers to buy US-ETFs directly. However, this may change in the future if the EU enforces its regulations on these firms.

Open a brokerage account with a non-European company

If you don't have a non-European address, you can still open an account with a brokerage firm that operates within Europe but also offers services to European clients. While some non-European subsidiaries of brokerage firms will only accept clients with non-European addresses, there are US firms that accept European clients without adhering to EU regulations. This means that EU customers can buy US ETFs directly, although this may change in the future if the EU enforces its regulations on these firms.

Tradestation and Tastyworks are examples of US-based firms that allow EU citizens to trade US ETFs. Tastyworks, in particular, has been described as a good option because it doesn't charge any fees for buying stocks and ETFs, which is a major advantage when compared to most European brokers.

Another option is to use a platform like Birdwingo, which is a Czech/Slovakian platform that uses the US broker Alpaca Brokers to allow users to buy US shares and ETFs.

It's important to note that there may be tax implications when using these methods to invest in US ETFs, and the regulations around this are complex.

Get an exemption (treated as elective professional client)

To invest in US-domiciled ETFs from Europe, one method is to get an exemption by requesting to be treated as an "elective professional client". This means that you are asking to be treated as a professional client, despite not being one per se. This option is available to retail clients who meet specific requirements outlined in the EU Directive MiFiD II, Annex II.

To be considered for this exemption, an individual must demonstrate expertise, experience, and knowledge in the investment field. The investment firm will conduct an assessment to ensure that the client is capable of understanding the risks involved and making informed investment decisions. This waiver of protection is only valid if the investment firm's assessment provides reasonable assurance that the client meets the relevant criteria.

To satisfy the requirements for this exemption, at least two of the following criteria must be met:

• The client has executed transactions of significant size (typically considered as €200,000 or more) on the relevant market, with an average frequency of 10 per quarter over the previous four quarters.
• The client's financial instrument portfolio, including cash deposits and financial instruments, exceeds €500,000.
• The client has worked in the financial sector for at least one year in a professional position that required knowledge of the relevant transactions or services.

It is important to note that by requesting to be treated as an elective professional client, individuals may give up certain protections afforded to retail clients. They must also acknowledge that they understand the implications of this decision.

Buy US-ETFs indirectly through options

European investors can buy US-ETFs indirectly through options. This method is a bit more complex but is perfectly legal and compliant with current EU regulations.

Here's a step-by-step guide on how to do it:

Step 1: Understand the Basics

• Options are contracts that give the holder the right to buy or sell an underlying asset, in this case, a US-ETF, at a specified price (strike price) by a specific date (expiration date).
• There are two types of options: call options and put options. Call options give you the right to buy the US-ETF, while put options give you the right to sell it.

Step 2: Choose Your US-ETF and Option

• Select a US-ETF you want to invest in. For example, Vanguard Total Stock Market (VTI).
• Identify the current market price of the US-ETF. Let's say VTI is currently trading at $230 per share.
• Find options for this US-ETF with expiration dates close to the current date. For example, there may be a put option expiring today with a strike price of $240.

Step 3: Sell a Put Option

• Sell (also known as "write") a put option on the chosen US-ETF.
• The put option should have a strike price slightly higher than the current market price. In our example, the strike price is $240, which is $10 more than the current price of $230.
• Sell the put option using a limit order placed between the bid and ask prices.

Step 4: Wait for Option to be Exercised

• If the US-ETF's market price remains below the strike price until the expiration date, the option will likely be exercised.
• In our example, if VTI is still trading below $240 by the end of today, the option will be exercised.

Step 5: Buy the US-ETF

• When the put option is exercised, you will be obligated to buy the underlying US-ETF.
• The purchase will be for multiples of 100 shares, as each option contract represents 100 shares.
• In our example, you will need to pay $24,000 to receive 100 shares of VTI.

Step 6: Understand the Tax Implications

• The income received from selling the put option will be taxed immediately.
• The cost basis of the US-ETF will be the strike price per share. In our example, the cost basis will be $240 per share.

This method of buying US-ETFs indirectly through options can be advantageous for European investors looking to gain exposure to the US market while navigating EU regulations. However, it is important to carefully consider the risks and tax implications before proceeding.

Hire a financial management firm

If you're an EU-based investor looking to invest in US-domiciled ETFs, you may encounter some difficulties due to EU legislation. Since 2018, regulations have made it challenging for European retail investors to trade US-registered ETFs because of non-compliance with the Undertakings for Collective Investment in Transferable Securities (UCITS) directive. This means that US-domiciled ETFs cannot be authorised for sale to EU retail investors.

However, if you are determined to invest in US-domiciled ETFs, there is an option to hire a financial management firm. Financial advisors can set up an account for you and buy US-ETFs on your behalf. They will manage your account, but this service often comes with additional costs of around 0.5-1.5% per year.

• Expertise and Specialisation: Look for firms that have a strong track record in managing investments in US-ETFs. Ensure that they have a deep understanding of the US market and the specific regulations that apply.
• Fees and Costs: Financial management firms typically charge fees for their services, which can vary depending on the firm and the complexity of your investment needs. Be sure to understand all the associated costs, including management fees, transaction fees, and any other charges.
• Customised Investment Strategies: Discuss your investment goals and risk tolerance with the firm. Ensure that they can provide a tailored investment strategy that aligns with your objectives. Ask about the types of US-ETFs they typically recommend and the rationale behind their choices.
• Performance and Track Record: Review the firm's historical performance and ask for references from previous clients. Understanding their track record will help you assess their ability to make sound investment decisions and achieve positive returns.
• Regulatory Compliance: Ensure that the financial management firm you choose is authorised and regulated by the relevant financial authorities. This is crucial to protect your investment and ensure that they operate within the legal framework.
• Transparency and Communication: Choose a firm that maintains open and transparent communication with their clients. They should be able to explain their investment strategies, provide regular updates, and answer any questions you may have promptly.
• Customer Service and Support: Opt for a firm that offers excellent customer service and is responsive to your needs. They should be able to provide guidance, address your concerns, and assist you in navigating the complexities of investing in US-ETFs from Europe.

Remember, while hiring a financial management firm can provide expertise and guidance, it's essential to do your due diligence before committing to any investment strategy. Carefully consider the fees, potential risks, and the level of involvement you want to have in managing your investments.

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