8 things about index fund investing specific to Europeans

The majority of the books around personal finance, passive investing, index funds and ETFs have a US perspective. There is value in those books since the majority of their knowledge is generally applicable to European investors as well.

Yet I wanted to point out a few things that (only/mostly) European investors in ETFs need to be mindful of. The differences between European and US investing mostly come from differences in regulatory/tax regimes as well as due to the fact that in Europe these financial services (e.g. brokers, funds) are often offered across borders.

1. Dividends distribution policy

European ETFs may distribute dividends to their investors (distributing) or reinvest the dividends in the fund (accumulating).

In some European countries, accumulating ETFs are advantageous because the investor will not pay dividend taxes during the holding period resulting in a higher amount of money invested.

In other countries, distributing and accumulating ETFs are taxed the same way. The only advantage to accumulating ETFs comes from not paying broker transaction fees to reinvest dividends

2. Stock Exchange and Currency

The same ETF may be listed in different stock exchanges and currencies. For example, the iShares Core MSCI World ETF is listed in 9 European stock exchanges and in EUR, GBP and USD.

Your broker may provide you the ability to buy that ETF in any of the available exchanges. My recommendation is to pick the exchange that leads to less costs in currency conversion, less costs in transaction fews and/or has more trading volume.

3. Fund Domicile

The fund domicile is the “home country of a fund”. Popular domiciles include Ireland and Luxembourg. The fund domicile affects the taxes an investor has to pay.

Ireland is usually a preferred domicile because it has tax treaties with many countries allowing for example the funds to pay lower standard withholding tax on US-source dividends (15% instead of 30%). Ireland also does not withhold taxes for non-Irish investors in Irish domiciled funds.

4. Investor Tax Reporting

Depending on your tax residency, funds might have to comply with local regulations in order to simplify your taxes obligations. Always prefer funds that are “reporting” or “transparent” to your tax residency. Notable tax residencies where this is an important concern are Germany, UK, Switzerland and Austria.

5. Synthetic funds

In the US, index funds are required to use physical replication to track an index. In Europe an index fund may also use synthetic replication to track an index.

In synthetic replication swaps are used to track the index instead of holding the securities of the index.

6. Broker country

Your stock broker may not operate out of the same country where you are a tax resident. Consequently, that might require different tax filling processes when compared to a local broker.

For example, if you live outside of The Netherlands and you use DeGiro you need to account for the fact that DeGiro won’t withhold any dividend taxes and its transactions may need to be filled under the “foreign assets/income” section of your tax declaration.

7. Available ETFs

You won’t have access to many of the ETFs you see described in the books since they aren’t compliant with European regulations (e.g. MiFID II and PRIIPS). For example the Vanguard Total Stock Market ETF (VTI), Vanguard Total Bond Market ETF (BND) or Vanguard Total International Stock ETF (VXUS) aren’t available for European investors.

There are good alternatives to those ETFs in Europe and you may find them through a good ETF screener.

8. Retirement savings accounts

Retirement savings accounts are tax-sheltered investment vehicles that allow you to invest for retirement. You may invest in ETFs or index funds through these investment vehicles. They are very popular because they allow you to increase your returns by reducing your taxes during the wealth building phase. In some way, through these vehicles, the State and/or your employer will contribute to your retirement provided you contribute to it as well.

These types of products are highly dependent on the local tax/regulatory regime therefore you won’t find in Europe any 401k or Roth IRA. Actually, every country in Europe will have a different approach to this type of investment vehicle.