This article was last updated on December 31, 2019
The following article will tell you the options in buying ETFs in Europe, including US ETFs.
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What are ETFs
ETFs or ‘Exchange-Traded Funds’ have made their first entry in 1993. An Exchange-Traded Fund is similar to that of stocks and is usually traded in Stock Exchanges.
It generally consists of assets such as Bonds, Stocks, Equities and Commodities which exist in order to keep the trading closer to the Net Asset Value (with a slight chance of causing deviations as well). Each ETF individually consists of more assets. For example, The ETF which follows the index S&P 500 consists of 500 equities. Some of the popular Equity Index following ETFs are ‘NASDAQ 100’ and ‘S&P 500’.
Asset Management Companies like Vanguard or BlackRock issue ETFs and each individual asset management company are able to issue more ETFs. In many ways, ETFs generally track an Index which is Stock Index or Bond Index. It is estimated that between the time period of 1993 – 2015, an amount of 2 trillion US dollars was invested in ETFs in the United States of America.
The prime features which make ETFs into an attractive investment option are their low costs, tax efficiency, availability of many choices, features similar to that of stocks, etc.
Different types of ETFs
Low Costs: ETFs have low costs when compared to that of other mutual funds. The annual overall costs which can be 0.1% whereas the annual management fees of mutual funds can be around 1-2%.
Tax Efficiency:ETFs have an attractive tax efficiency when compared to mutual funds. There is an exception in the case of ETFs provided by the Vanguard company as there might not be the enjoyable tax advantages.
Many Choices:There is a wide range of options for choosing ETFs from various Regions, Sectors, etc.
Trading of ETFs:Unlike the mutual funds which can be traded only at the end of the day, ETFs can be bought or sold whenever the market is available.
Buying an ETF online:
The common questions people have in mind when they want to buy or invest in an ETF online are: What are the most important aspects one should keep in mind while buying an ETF online? How can one invest in an ETF online? What is the process involved in buying or selling an ETF online?
The steps involved in buying an ETF online are:
- Get the exact information about the aspects like country, region, or sector in which you are willing to make a trade. ETFs can be used as a tool for your trade on the performance of a country, region, or sector. If you predict a rise in the market of a country, you can buy an ETF which follows an index of that country’s stocks put together. Otherwise, you can buy an ETF of a specific sector that follows the index of the sector’s stocks for a respective country if you predict a rise in a sector and not the whole country’s market. For example: if you think the US market will experience an increase, then you can go ahead and buy an ETF which follows the index composed of US stocks like the S&P 500 Index. If you expect a hike in a sector, Let’s say Technology, Then you can buy an ETF which tracks index containing US technology-related stocks such as ‘NASDAQ 100’.
- Refine the ETFs based on their size and expense ratio. Always try to prefer choosing an ETF with a bigger size and lower expense ratio. ETFs which are big in size tend to be more liquid than those which are small in size. ETF size is classified based on their ‘Assets under Management’ which is also known as ‘AUM’. The higher the value of ETF would be, the more increase in the liquidity of the ETF. Expense Ratio of an ETF indicates the average annual fee of the ETF. It is highly recommended that you choose ETFs with an expense ratio lower than 0.1%.
- Select the domicile, stock exchange and currency of the respective ETF you want to trade with. Domicile represents the country where the ETF issued. The Taxation of an ETF varies according to the Domicile. 90% of the ETFs are based in US and EU domicile (70% US domicile and 20% EU domicile). The Stock Exchange is different from the Domicile.
You can trade an ETF on various Stock Exchanges. Although it is advised to choose from the Stock Exchanges with low commission rates. The commission rates actually vary according to the broker you choose. In order to avoid the conversion fees, you should choose the ETF and broker with the same currency as different Stock Exchange results in a different currency.
- Getting a good broker is also very important. Considering the important aspects such as broker’s fees, easy access, trading platform, and user-friendliness, you can find a suitable broker according to your requirements. It is also important that you choose a safe and reputed broker while you are searching for one in order to avoid risks.
- Purchase the ETF you are interested in trading. Search for the ETFs you are willing to purchase on an online trading platform. You can buy an ETF through the online trading platform where you can choose from different order types.
- Always keep track of the details of your ETF regularly without fair. Now, that you have purchased the ETF, it is very important that you monitor the details every once in a while. It is best if you develop a strategy on choosing to keep the ETF for a longer period or a shorter period and manage them properly in order to prevent loss and target profit.
The above-mentioned tips are the basic and necessary techniques for you to trade an ETF. By having a good plan and following these techniques thoroughly, you can be able to reap benefits from the ETFs that you have purchased.
Do it yourself providers (DIY)
Some of the best in market online brokers for investing in ETFs in 2019 are:
- ‘Charles Schwab’ – considered as the best overall online platform for making an investment in ETFs. It is and has always been the best advocate for people who invest individually. It is also well known for its discounts. It is also considered to be one of the most affordable platforms in the market. The brokerage’s commissions on all ETFs is ‘Zero’ and individual stock trades are free as well.
- You can build a best and diversified portfolio using the ETF Portfolio Builder.
- You can find the best funds for the portfolio using the ETF screeners.
- There are no additional or hidden charges to use Schwab’s platforms and mobile apps.
- Having the overabundance of platforms makes the tools hard to find.
- Forcing the investor to hire a financial advisor who belongs to their platform.
- ‘Fidelity Investments’ – the best for online research and tools. They provide good ideas for making an investment that targets income. Their research center provides ETF comparisons and ETP comparisons in order to guide the investor for better and enhanced results. Excellent research and Commentary. Their Screener gives you the ability to search based on their standards which include fundamentals, exposures, ratings, effectiveness, unpredictability, etc.
- The process of researching and analyzing ETFs is made easy with the help of their ETF Research Center,
- It has an easy to use mobile app.
- It is recommended to use more than one platform in order to access all the offers provided by them.
- It is not open 24 hours and 5 days a week.
- ‘TD Ameritrade’ – it is best for beginners to make an investment in ETFs. There are a number of advantages for US-based customers as they charge no trading commissions on ETFs, equities, options, etc. If you hold an ETF for 30 days (also known as the ‘Short Term Trading Fee’), there won’t be any charges. It is the best choice if you want to monitor your investments online or using a mobile device.
- You can make voice-driven trades with the help of Amazon Alexa.
- Access to all of their trading platforms and both their mobile apps.
- Access to a good collection of articles, educational videos and live events at 360 branches in the United States.
- If not able to hold an ETF for 30 days, you will be charged 13.90 dollars as charges.
- ‘Vanguard Group’ – Being considered as the world’s largest provider of mutual funds, it is a good choice of trading ETFs which is apt for Investors. It is also the second-largest provider of ETFs. It is of basic level and not preferable for active traders or individuals willing to involve in progressive charting capabilities. An excellent choice for people who want to invest in low-cost ETFs and wants to make the advisor do the analysis.
- No commission on trading about 1800 ETFs supplied by more than 100 providers.
- Analysis on an advanced level.
- Very low management costs when compared to most others.
- Personal Advisor Services are available at an affordable cost.
- Account service fee is applicable for the Vanguard assets which are less than $10,000.
- Not apt for active investors and charting professionals.
- ‘E*TRADE’ – No trading commissions for equities, options, and ETFs in the United States. They offer efficient tools and resources. The features such as the All-Star ETF list, ETF Screener and Prebuilt ETF Portfolios (a tool which helps in selecting the best ETF based on your preferences such as Investment Time Frame and Risk Tolerance.) help in researching your own investments.
- Available 24/5 for some active ETFs.
- You can quickly react to after-hours market news.
- Tools can be used through a web-based platform.
- Availability of Mobile App watchlists.
- Very interactive chat and call support available throughout the entire week.
- Margin rates are a bit expensive.
- Similar to ‘Fidelity Investments’, it is recommended to use multiple platforms in order to access all the offers provided by them and the tools you intend on using.
- ‘Ally Invest’ – Ally Invest is another good US-based broker where you can be able to make a good profit while investing in ETFs. It has very good research tools and resources that can guide you while trading in ETFs. Its web-based platform is user-friendly and highly efficient. It also comes with similar advantages to that of the other online brokers that we have discussed earlier.
- No commission and No account minimum.
- Very good and extremely helpful research and tools.
- Nicely designed and efficient web-based platform.
- An amount of $9.95 is applicable to transact the mutual funds.
- There are no branches for this online broker.
You can also consider using Robo-advisers (like Betterment) to make an investment for you. Always try to keep these tips in mind and look for the best broker online to make a profit while investing in ETFs.
|Broker Name||Charles Schwab||Fidelity Investments||E*TRADE||TD Ameritrade||Vanguard||Ally Invest|
|Fees||$0||$0||$0||$0||$7 per stock||$0|
|Promotion||Upto $500||n/a||Upto $2500||n/a||n/a||$50 – $3500|
|Number of commission free ETFs||all||all||all||all||Around 1800||all|
|Mutual fund Transaction Fees||$49.95 per trade||$19.95 per trade||$0||$0||$20 for account balance less than $10,000.||$9.95 per trade|
Choosing between US or EU ETFs:
As you’ve become familiar with the details about an ETF and online brokers to buy ETFs, here are some details about ‘US ETFs’ and ‘EU ETFs’. As we have already discussed the US contributes to 70% of the ETF market, whereas the EU contributes to 20%. The differentiation of US ETFs and EU ETFs is based on the domicile which refers to the country or region where the ETF was issued. An ETF can track the same index and have a different domicile. The prime factors that should be taken into consideration while choosing between the US and EU ETFs are Taxation, Liquidity, and Regulation.
- ‘Taxation’ – The taxation of an ETF is influenced by the domicile of the ETF and the tax residency of the respective Investor. One may experience taxes such as withholding tax, income tax, and capital gain tax while trading in ETFs. So always take these aspects into consideration while you are making the trade. You can get the information about these details from your accountant or your tax advisor.
- ‘Liquidity’ – By the end of the year 2018, The EU ETF market had a value of 800 billion dollars, while the US ETF market was somewhere around 3,700 billion dollars. It was mentioned earlier that ETFs with higher Liquidity is more preferable for transactions over a short period of time when compared to that of ETFs with lower Liquidity. EU ETFs have lower Liquidity than US ETFs making them have higher spread costs.
- ‘Regulation’ – A Regulation came into force in January 2018 which officially blocks European Investors from buying US Domiciled ETFs. This is due to the lack of a Key Information Document. They can trade in EU Domiciled ETFs which agree with the rules of new PRIIPS (Packaged Retail Investment and Insurance-based Products) regulation.
How can I Buy US ETFs in Europe:
You may be wondering now that “Isn’t there any chance to buy US ETFs from Europe?”. Don’t worry we will give all the details that will clear your doubts regarding this issue.
According to the PRIIPS regulation, you cannot trade in US Domiciled ETFs while being from Europe as the US Domiciled ETFs don’t contain ‘KID’. Key Information Document comes with the details of an investment such as risk, cost involved, etc. This Key Information Document makes the investor well informed about the investment. The biggest issuers of ETFs announced that they weren’t willing to provide Key Information Documents. Instead of that, they suggested that EU clients can make investments in similar EU Domiciled ETFs which is actually accepted by the PRIIPS Regulation.
The alternative is to invest in ‘UCITS’ (Undertakings for Collective Investments in Transferable Securities) ETFs. The European Union regulated these ETFs and they have a UCITS KID. You can invest in your favorite ETFs if they are UCITS ETFs from issuers such as Vanguard and BlackRock. These two issuers are mentioned among many other issuers as they have high liquidity due to their assets under management worldwide, where Vanguard stands at $5.30 Trillion and BlackRock at $5.98 Trillion. As they have higher assets under management, they have high liquidity as well as lower fees.
The following are the S&P 500 UCITS ETF from Vanguard and BlackRock.
For Vanguard the S&P 500 UCITS ETF is as follows:
Vanguard S&P 500 UCITS ETF (USD) Distributing (VSUD)
For BlackRock the S&P 500 UCITS ETF is as follows:
iShares Core S&P 500 UCITS ETF(CSPX)
Comparison of US-domiciled funds and UCITS funds:
Three major aspects that are considered while comparing the UCITS funds to US Domiciled funds are:
- Annual Expenses
- ‘Annual Expenses’ – The annual expenses of the US Domiciled ETFs are comparatively lower than that of UCITS ETFs.
- The annual expenses of ‘Vanguard (US Domiciled) VOO’ are ‘0.04%’.
- The annual expenses of ‘Vanguard UCITS VSUD’ are ‘0.07%’.
- The annual expenses of ‘iShares UCITS CSPX’ are ‘0.07%’.
Here we can observe that the annual expenses of trading US Domiciled ETFs are lower than UCITS ETFs.
- ‘Commissions involved while making a trade’ – These include the charges when you are buying ETFs for the first time, When you are trading (buying or selling) to maintain a good and well-balanced portfolio, While using the help of communicative broker services and while buying ETFs which sum up to $100,000 which follow an index of S&P 500 . These charges would be as follows:
- The commission charges for ‘Vanguard (US Domiciled) VOO’ are ‘2 USD’.
- The commission charges for ‘Vanguard UCITS VSUD’ are ’50 USD’.
- The commission charges for ‘iShares UCITS CSPX’ are ’50 USD’.
Interactive broker charges would be around ‘$0.005 – $0.0075’ per share based on their routing. Whereas for trading in the London Stock Exchange it is ‘$0.05’. Here we can see that the commission charges for the US Domiciled ETFs are comparatively very low than that of UCITS ETFs.
- ‘Liquidity’ – We already know that the liquidity of an ETF depends upon the assets under management of the respective ETF. An Increase in the number of assets leads to a high amount of liquidity and a lower spread cost. So, with high liquidity, the ETF’s buying price and selling price can be similar to each other.
- The worth of the Assets owned by ‘Vanguard (US Domiciled) VOO’ is ‘$448.6B’.
- The worth of the Assets owned by ‘Vanguard UCITS VUSD’ is ‘$22.4B’.
- The worth of the Assets owned by ‘iShares UCITS CSPX’ is ‘$32.9B’
The US Domiciled ETFs have higher liquidity than UCITS ETFs as the assets under management for the US Domiciled ETFs are relatively higher.
We can come to the conclusion that the UCITS ETFs are very much less beneficial than US Domiciled ETFs. This is due to the results we got when compared to the US Domiciled ETFs with the UCITS ETFs. Although there is more benefit while trading in US Domiciled ETFs, People who want to make an investment won’t get lucky as the Key Information Document is not available for the US Domiciled ETFs and the PRIIPS regulation won’t allow the trading of ETFs without Key Information Document.
There is an advantage while trading in UCITS ETFs though, The US Estate Tax isn’t applicable for this type of trading. The US Estate Tax is applied when the amount reaches over $60,000 for the US Domiciled ETFs and the tax would be around 40% unless your country has a Tax Treaty with the United States of America.
Although, there is a much difficult way to trade in US Domiciled ETFs if you are a professional client. The requirements for a professional-client are a huge portfolio, half a million money, Expert level professional background and a considerable amount of experience in trading.
After considering all the given information, you can choose the ETF in which you are willing to make an investment. By following the above-mentioned tips and techniques you can make a successful profit while trading in ETFs. Hoping that reading this article was helpful to you.
Also to bare in mind
The average investor in ETFs, when doing the DIY approach, often loses to the market for emotional reasons.
So many associates of mine have panic sold after 2008-2009, after Brexit or in the aftermath of Trump’s election.
This is the biggest reason for the results below:
So in the same way that a gym instructor can help with motivation and behavior, a good advisor can do the same thing.