Investing has never been easier - How to pick the perfect ETF
Did you know that some ETFs beat their benchmarks consistently? I recently received a comment from a reader related to this topic. He was somewhat confused about ETF fees (spoiler alert – forget about TER that everyone is using!)
This came at a time when I also received questions about the four currency types that are not very intuitive and I thought of using this occasion to make a deep dive into European ETF basics that may hopefully benefit some of you (US Investors may also get some interesting insights)
If you read about Financial Independence Investing from a US source you know how easy it is to buy Index Funds in North America (select two Vanguard Funds – US Bonds & Global Stocks… sit back, relax and enjoy the Passive Income!)
And yet Europe and the UK are a bit of a different ballgame – especially if you want to have a little bit of control of your portfolio
For instance, Vanguard doesn’t even cover 5% of the market in Europe
Europe has always been fragmented but despite all the below considerations, it’s never been easier to invest if you know the basics
By doing some initial research you can avoid life-long fees charged by various advisors, which may make you substantially wealthier in the long run (check a simple calculator to understand what even a 1% fee can do to your portfolio)
Choosing ETFs includes deciding which ETF provider to select, how Fund characteristics play a role, making sense of which currencies matter most, navigating fees, dividend reinvesting and tax implications. Here’s what you need to know to pick the right UCITS ETF
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How to choose a ETF in 6 Easy Steps
#1 - Which European ETF provider is Best?
Key European ETF providers by Assets under Management
The US big three Asset Managers – BlackRock’s iShares, State Street SPDR and Vanguard are all present but local players have also a strong footprint – DWS Xtrackers, Société Générale’s LYXOR, Amundi ETFs or UBS ETFs to name a few
As of Q1 2019, total assets of European ETFs exceeded €750 bn out of which:
- BlackRock’s iShares dominates the European Market with a market share of c. 45%
- DWS’ Xtrackers managed roughly 12% of all assets
- Société Générale’s LYXOR is the third largest in terms of assets under management with c. 9% Market Share
Key European ETF providers by Count
Now that we know which providers to choose from (Vanguard despite its small size in Europe is still a great option), let’s look at other considerations for a European Investor looking to buy International Bonds hedged to his domestic currency (EUR) – the same checks apply to Equities
- Given the need for currency hedging a Bond ETF is a good example to illustrate all the checks before buying an ETF
- I selected one of the candidates for a typical long term portfolio (e.g. Financial Independence, Retire Early goals) – the Xtrackers II Global Government Bond UCITS ETF
Anatomy of an ETF - Key Considerations
#2 - How do I find a European ETF?
Ways to look up an ETF
In most cases you can use the name of the Fund or its ISIN to search for the fund with your stock broker:
- FUND NAME – this is the easiest way to look up a Fund, type the first letters and the ETF will likely show up
- ETF SHARE CLASS – Once the fund shows up select the ETF Share Class. This is important and you will often find clues about income treatment and currency hedging here (more on that, below)
- ISIN – The second best way to look up a Fund. It is specific to each ETF globally. The first two letters stand for the domicile of the fund (e.g. LU0641006456 for Luxembourg). It’s convenient, because ISINs for ETFs with multiple currencies will have the same ISIN
- There are two exceptions to the same ISIN rule, though. It’s not the case when the ETF is currency-hedged or/and because some distribute income while other may reinvest (aka accumulating) which case ISINs will differ (as below)
The XTrackers ETF has multiple classes with currencies to which it's hedged and income treatment (Dividend vs. Reinvesting)
- TICKER (also called TIDM) – is comprised of a few characters linked to a specific to the exchange. In the example above you can see an indicative ticker for our selected Class (1C EUR). The problem in Europe is that since the same Fund can trade on multiple stock exchanges they might have different tickers as well so it may not always be easy to find it that way. This one in particular has two tickers depending on whether it’s traded on Italian Stock Exchange (XGSH) or German (DBZB)
- SEDOL – a unique instrument identifier allocated by the exchange (this is not the most frequently used)
#3 - Do ETF Size and Inception Date matter?
ETF Size Matters
Look out for your the size of your specific Fund- it should be at least 100 million, ideally above €250m to reduce risk of the fund closing e.g. due to commercial reasons
Over 100 ETFs close each year. I have personally experienced it and since it was a busy period in the office I was caught off guard at that time and I didn’t sell before it closed
The proceeds of ETF liquidation were ultimately paid but it took a few weeks before hitting my account which is always an opportunity cost
How do I determine Fund size?
Size of ETF Classes with different currencies and income treatment
When you have pre-selected a fund, review its documentation and look for overall size, Class size may be misleading e.g. for a Swiss investor the €80mm size may seem small
Total Assets under Management of the Fund
However, when looking at the overall size it is close to €2.5bn and one of the largest International Government Bond Funds
Should I check ETF Inception Date?
Again, closure risk is part of the risk of being an active market participant and new ETFs always have more commercial risk than large, more established Funds with long track record
#4 - Which ETF currencies should I pay attention to?
Let’s use the same example as above -with an ETF investing in Developed World Government Bonds as explained here
You should pay particular attention to Assets Currency and Currency Hedging
1. What is Underlying Assets Currency?
Example of currency exposure for a Global Developed Government Bond ETF
The Underlying Assets currency has a major impact on the ETF’s return
The Underlying Assets currency applies at the overall Fund level. For example, the Xtrackers Global Developed Government ETF invests in Developed World Government Bonds and the major countries for those Indices and ETFs are USA, Japan and France
For each of them the underlying asset currencies are primarily the USD, JPY and EUR but also other countries with lower exposure in the ETF. You will be exposed to fluctuations of those currencies, unless you decide to hedge
2. What is Currency Hedging?
Hedging can have a major impact on performance (example of difference in return for UK Investor holding a S&P 500 ETF)
Outside of Underlying Asset Currency this is the second most important currency aspect to pay attention to
Currency hedging applies at the ETF Class level. As a European Investor, in most cases you will have the option to hedge the underlying currencies – as of September 2020, there are over 550 currency hedged ETFs in Europe
If you hedge the Asset currency, the Asset Currency risk (and performance) becomes largely irrelevant
Is currency hedging beneficial? It depends on your time horizon and whether it’s Equities or Fixed Income as I have explained in detail here
In the example above if you are a European Investor and choose the EUR Hedged Class you will be earning income in EUR from International Bonds without taking any currency risk
In this case the currency column shows your effective currency exposure after hedging (it happens to be the same as the Trading currency)
3. What is Trading Currency?
The Trading Currency does not change the currency risk you are taking by investing in the underlying assets and thus, this currency also doesn’t have any influence on the overall ETF performance
The Trading Currency applies at the ETF Class level. Is it the currency listed on the Exchange in which the ETF is quoted with your Broker. It’s also usually (depending on the broker) the currency you will see in your broker account when you look at your holding
You are not holding or exposed to this currency in any way. At purchase you exchange your own currency to buy the ETF Trading currency (in order to buy the Fund) which gets exchanged against the Fund Base Currency. However, ultimately the Fund buys the underlying Assets so all the intermediary currencies don’t matter much. The opposite happens when you sell
In a nutshell, you can largely ignore the Trading Currency
However, it may be marginally beneficial if the trading currency is your own currency but it’s not mandatory if you don’t have that option. The reason for that pay an additional (usually small) exchange rate conversion fee at the time of purchase and sale if you don’t buy in your own currency. As you can see below, there is ample choice in major European currencies so you will probably have the option to use your own currency as Trading currency
Relative number of European ETFs listed in 4 Major Trading currencies
4. What is Fund Base Currency?
The Fund Base Currency simply refers to the currency that a fund reports in and not the currencies of the underlying securities which you are exposed to
The Fund Base Currency applies at the overall Fund level
Since the Global Government Fund has classes in different currencies and some are distributing dividends while others are reinvesting them there are various available options for investors
However, the Fund Manager must consolidate all information and will report in a unified way (usually using the benchmark currency as reference). I this case everything is reported in EUR (but for a large proportion of Global funds this currency is USD and that shouldn’t stop you in any way, as European Investor, from choosing such Fund)
You can largely ignore the Fund’s Base Currency, since it’s irrelevant to the performance of your investment
Note that for distributing funds dividends are distributed in the fund currency. Your broker will convert the distributed amount into your currency for an additional conversion fee
#5 - How much do ETFs cost?
One of the main advantages of passive investing is its low costs
However, there are certain misconceptions about the true cost of an ETF which is not the TER or OCF.
Below is all you need to know about ETF Costs but it doesn’t quite tell you how to track it – for that, I have written a separate Q&A on how to buy the cheapest ETF
Breakdown of Provider-related ETF Costs
The TER (Total Expense Ratio) or OCF (On-going Charge Figure) is only the visible part of the total (ETF Provider related) cost and includes trading costs and management expenses
ETFs have been undergoing significant on-going costs’ compression. In fact, some of the ETFs in the US are sold at no cost
On-going Costs
Average On-going Fees for Equity Funds
Equity ETF Fees have been on a downward trend over the past decade but vary depending on the complexity of the ETF and the underlying Market (e.g. Emerging Markets still require a fee premium compared to Developed Markets)
Average On-going Fees for Fixed Income Funds
This holds true for Bond ETFs as well, even though Global Government Bond and Aggregate ETFs (nor represented in the data from Morningstar) are still a bit more expensive
As I mentioned in a comment related to all Global ETFs you should think twice before paying more than 0.4% per year
Less Visible Costs
The next question then is – what is the less visible part and how can I track it?
- The less visible part of Tracking Difference has two components: costs and revenues. It has not been formally agreed with the European Union, hence it’s not standardized but must be taken into account.
- Less visible costs that may not be directly shown include Rebalancing or Swap Costs (for Synthetic ETFs)
- ETFs can have side hustles, too. And side hustles can make a lot of money! The less visible part also includes some additional revenues that may increase the ETF’s performance due to Security Lending (e.g. for the Xtrackers Global Government Bond ETF 70% of revenues go directly into the Fund)
- All the above items add up to the Tracking Difference which is the difference in return between the Benchmark and the ETF
Tracking Difference is the True Cost of holding an ETF!
Let’s have a look at the EUR Class performance during the past 10 years
Evolution of Benchmark and ETF Prices over the past 10 years
There is a certain lag in performance that grows over time due to fees and other costs
The Fund advertised TER is 0.25% and looking at the track record the Fund has done a good job at keeping that ratio
In a nutshell, the Tracking Difference has been consistent with the TER implying no net hidden costs i.e. less visible costs and revenues evened out over time with
Difference in Price over the past 10 Years
As you can see in the table above, the Benchmark has returned 3.23% per year over the past decade vs. 2.98% for the ETF implying a Tracking Difference of c. 0.24% just below the TER of 0.25%
Monthly tracking wasn't always smooth...
I haven’t got any knowledge of what happened over that time period but an outside-in look at the data makes me think that the first 5 years there were slightly less consistent while some event (or data issues) caused tracking discrepancies in 2015, swiftly corrected in the next months. More recently, the index replication was very accurate
... but remained consistent in the long run
I had a look on what would have been an ideal tracking with 0.25% cost and what the ETF actually did.
You can see that the tracking does remain consistent over a longer time period
What I didn’t mention so far is the concept of Tracking Error that is the deviation of the difference in returns. In this case the Tracking Error is 0.1%, which means that over long periods of time you will get a 0.25% annual drag on performance and +/- 0.1% of typical deviation (assuming future tracking will remain consistent with the past which is never certain)
Tracking Difference vs. Tracking Error
If you primary goal is the long term performance of the ETF I’d focus on Tracking Difference but if you are buying and selling ETFs frequently you may also have a look at Tracking Error
Be (a bit) more tolerant with Bonds
I’d have low tolerance with Tracking Difference for plain vanilla (very common) products like the S&P 500 Index or main European Indices
However, I would be slightly more tolerant with Fixed Income ETFs
Bonds are much less liquid then Stocks. According to Citibank of the 21,175 publicly registered company bonds in the US in 2018 only 246 traded daily which means Bonds are less liquid than Stocks that trade continuously
There are also other issues related to replicating Bonds and replication relies a lot more on sampling techniques (see below)
How do I know that an ETF is outperforming a Benchmark?
In red, ETF outperformance vs. benchmark after taking into account TER and net revenues
It is not uncommon for some ETFs with higher TER/OCFs to outperform lower TER/OCF competitors using additional returns such as securities lending – e.g. Equity ETFs frequently make money and in fact outperform their benchmarks
Apparently expensive ETFs (high TER can in fact yield the highest net return – yes, negative fees!) can end up being the best Funds
When comparing funds, make sure:
- Funds you are comparing have the same underlying benchmark
- Funds have the same hedged currency
- The length of the analysis is at least one year (longer is better)
Doing my analysis requires access to Index data and some time for the analysis
A rough and simple way around it is to plot multiple ETFs using such tools as Trackinsight.com (or use their metrics). The best performing ETF would be a good proxy for a Fund with the best Tracking Difference. German speakers can also directly leverage TrackingDifferences.com.
I have also described the process of selecting the cheapest ETF
Your personal costs matter, too
Tracking Difference vs. Total Cost of Ownership
Remember, these are ETF Provider related costs and still exclude external fees and taxes you may incur that are specific to your situation e.g. Broker platform fees and commissions, Bid/Ask Spread on purchase and sale and any taxes
Ultimately, the most relevant cost figure is the Total Cost of Ownership (TCO) that includes ETF Provider Costs and any external costs and taxes
#6 - ETF Provider Methodology, Taxes & Stock Exchanges
1. ETF Replication Methods
Full replication vs Sampling
- Physical (full replication) – ETF holds positions in all companies as detailed in the index. This method is employed if the underlying assets are readily available, reasonably small in number and do not significantly alter (e.g. the 100 shares listed on the FTSE)
- Physical (sampling) – ETF holds positions in a relevant subset of the companies detailed in the index. The subset is chosen so that the performance of the fund matches the performance of the index as closely as possible. This approach might be used if the benchmark contains a large number of assets which change frequently (e.g. the MSCI World Index, with more than 1,600 constituents)
- Synthetic – ETF uses a financial derivatives to replicate the performance of the index to investors. Be aware that these ETFs do not hold the underlying positions (I tend to avoid these Funds)
2. ETF Domiciliation - Ireland vs. Luxembourg
Taxes drive the choice
- It’s worth knowing the registered home of your ETF to avoid tax complications later
- In Europe, most ETFs are domiciled in Ireland or Luxemburg, for various tax breaks reasons
- This website does not provide tax guidance and domiciliation is an individual tax related topic (e.g. Dutch Investors may fall outside of these two cases as described below)
- You know where an ETF is domiciled by looking at the first two letters of its ISIN e.g. LU0641006456 for Luxembourg
- Irish-domiciled ETFs benefit from the US/Ireland double taxation treaty, which reduces standard withholding tax rates on US stock dividends from 30 to 15 per cent and – may prove beneficial if your ETF invests in US Assets
- If you buy Worldwide exposure US will represent the largest allocation
- Luxembourg-domiciled ETFs are subject to the full 30 per cent tax rate for US Assets. However, Luxembourg does not charge any other taxes such as capital gains or dividend for non-resident investors of Luxembourg domiciled funds (you residency country still does, though) – depending on your tax residency this may be beneficial for non-US Assets
- For most other countries, outside US, Ireland and Luxembourg have similar withholding tax rates and where they haven’t, it would not matter much considering weights of those countries in a World ETF
- As mentioned, there are exceptions to these rules. If you are a Dutch Investor, the US has a tax treatment with the Netherlands that completely avoids any withholding tax leakage. It may be worth investigating buying an ETF domiciled in the Netherlands
3. ETF Dividends - Reinvesting or Distributing?
Perhaps it may seem so, but selecting between a Reinvesting (Accumulating) and a Distributing Share Class is very important
There are also limited resources available, because it doesn’t apply to US Investors! I have prepared a guide on helping you making this decision
The majority of European ETF Share Classes are reinvesting dividends
- Distributing Shares Classes will pay dividends and generate regular income from your portfolio that you can spend, if you need to. You can also use dividends as part of your rebalancing process although they are usually paid more frequently (it’s also worth checking how frequently you will get dividends)
- Reinvesting (Accumulating) Share Classes will maximize your future returns as they automatically reinvest your income back into the market with no extra fees (saves your time and reduces transaction fees)
- Both options i.e. accumulating and distributing (aka dividend paying) may not always be available. In this case it’s good to remain flexible
- Depending on your country of residence the choice may have tax consequences and a wise selection of ETFs may increase your returns
- In some jurisdictions, accumulating share classes are a way to avoid dividend taxes while in others accumulating funds and distributing are taxed the largely the same way (e.g. UK or Switzerland) regardless of physical dividend payment (it’s deemed to have been paid for tax purposes unless it’s in a tax protected vehicle like ISA or SIPP in the UK)
4. Broker selection - Exchanges for European ETFs
Number of ETFs listed on key Exchanges in Europe
- ETFs will usually be listed on multiple exchanges at the same time. Cross-listing allows to make ETFs accessible for local investors in multiple markets
- UCITS (Undertakings for the Collective Investment in Transferrable Securities) is an European Union regulation for mutual funds. The most popular ETFs available to European investors are UCITS compliant
- There were ETF listings on 15 major European exchanges
Choosing a broker is another topic, but keep in mind that they should at least cover most of the Exchanges above given that most ETFs are listed on these (most Brokers do).
The most liquid exchanges are XTERA and London Stock Exchange. Six Swiss may have a slightly different set of ETFs given that Switzerland Funds laws are not necesairly aligned with the European Union regulations.
Where can I find ETF Information?
You can find all information using the required documents that each provider is publishing, which includes:
- A Factsheet – ono/two-pager summarizing key information
- KIID (Key Investor Information Document) – Similar to the one above but legally required and hence standardized. This document is required for UCITS funds in Europe
- Prospectus – The long (and not always exciting) read
- Annual report – Regulatory Financial statements
Conclusion
There is probably a lot of new material here if you just started out. Take the time to digest it but remember that these are only ETF features
The most important decisions you will ever take in respect to your Financial Independence Portfolio relate to Asset Allocation, selection of the best Equity Benchmarks or Bonds
Don’t rush it, do your research first and ask questions (below) if needed
Good Luck and keep’em* rolling !
(* Wheels & Dividends)
REFERENCES
- David Nanigian, San Diego State University, ‘What Matters in ETF Selection?’, (2019) Academic Research Colloquium for Financial Planning and Related Disciplines, Available at SSRN
- J Blocher, RE Whaley, ‘Passive investing: The role of securities lending’ (2014), Owen Graduate School of Management, Vanderbilt University
Popular Guides
My fundamental reviews of Equity ETFs and Asset Allocation include:
- Investor Checklist - Ready to Invest? Have a look at the checklist before buying ETFs
- How to build a Long Term Portfolio for Financial Independence - Guide to creating a Smart & Simple Long Term Portfolios with ETFs
- All you need to know about International ETFs - including Developed vs Emerging Markets, Small vs Mid/Large Caps and country allocations with List of Best ETFs
- The Simplest Equity Portfolio - Comparison of Best Total World Equity Index Trackers
- How to pick the perfect ETF? - Investing in Europe is not quite the same experience as in the US but this guide will solve all your issues. Spoiler - don't use TER! (applies to US Investors as well)
- Which Assets do I need in my Portfolio? - Clean up your portfolio from assets you don't need. High Performance and low maintenance Asset Allocation Strategies
- How do I benefit from a market crash? - In the long run no crash (including Japanese style) can derail you if you do it right
- How to Invest for Short Term goals? - Medium Term Investing is more risky than long term portfolio - pay attention to the right asset classes
My fundamental reviews include:
- Spectacular Market Crashes - how much can you lose? How long will it take to recover? How to take advantage of the next recession
- What if my Broker goes Bust? How to choose a Broker that is safe
- What is the best rebalancing method? How to increase returns and reduce risk by rebalancing your portfolio
- What about currency risk? Should I hedge my Portfolio? - Hedge or not to hedge? Guide to hedging currency risk in your Equity and Bond ETFs
- Should you buy Gold? - Is it necessary to have an asset that generates no yield? What really drives Gold price?
- International and European Bond ETFS - For Long Term International Investors Bonds are key to protect their Equity Portfolios
- US Bond ETF Guide - Comprehensive Review of Blend Bond Funds, Treasuries, Corporates, High Yield, Inflation Linked, Muni ETFs
- Top 3 Corporate Bond ETFs - If you want to increase income buy these ETFs to invest alongside the FED [for US Investors only]
DISCLAIMER
All information found here, including any ideas, opinions, views, predictions, forecasts, commentaries or suggestions expressed or implied herein, are for informational, entertainment or educational purposes only. The information provided on Bankeronwheels.com is general in nature only and does not constitute personal financial advice
Before acting on any information contained on Bankeronwheels.com you should consider the appropriateness of the information having regard to your objectives, financial situation and needs, and seek professional advice where appropriate. Read the full disclaimer.
HAVE A QUESTION ABOUT INVESTING?
Drop it below or if you enjoyed my work and found it useful please do leave a comment or share it with someone that may benefit from it – I am grateful for your feedback
Note that this website is non-revenue generating. In addition to time I dedicate to this, I pay for hosting and software to provide you with the analysis
Stay safe & healthy,
Raph
FAQ
Choosing ETFs includes deciding which ETF provider to select, how Fund characteristics play a role, making sense of which currencies matter most, navigating fees, dividend reinvesting and tax implications. Here’s what you need to know to pick the right ETF
As of Q1 2019, total assets of European ETFs exceeded €750 bn out of which:
BlackRock’s iShares dominates the European Market with a market share of c. 45%
DWS’ Xtrackers managed roughly 12% of all assets
Société Générale’s LYXOR is the third largest in terms of assets under management with c. 9% Market Share
Choosing ETFs includes deciding which ETF provider to select, how Fund characteristics play a role, making sense of which currencies matter most, navigating fees, dividend reinvesting and tax implications. Here’s what you need to know to pick the right ETF
In most cases you can use the name of the Fund or its ISIN to search for the fund with your stock broker: FUND NAME is the easiest way to look up a Fund, type the first letters and the ETF will likely show up ISIN is The second best way to look up a Fund. It is specific to each ETF globally. The first two letters stand for the domicile of the fund (e.g. LU0641006456 for Luxembourg). It’s convenient, because ISINs for ETFs with multiple currencies will have the same ISIN
Funds can trade on multiple stock exchanges and they might have different tickers as well so it may not always be easy to find it that way. E.g. an ETF has two tickers depending on whether it’s traded on Italian Stock Exchange (XGSH) or German (DBZB)
ISIN is specific to each ETF globally. The first two letters stand for the domicile of the fund (e.g. LU0641006456 for Luxembourg). It’s convenient, because ISINs for ETFs with multiple currencies will have the same ISIN
There are two exceptions to the same ISIN rule, though. It’s not the case when the ETF is currency-hedged or/and because some distribute income while other may reinvest (aka accumulating) which case ISINs will differ
ETF Size Matters
Look out for your the size of your specific Fund– it should be at least 100 million, ideally above €250m to reduce risk of the fund closing e.g. due to commercial reasons
Over 100 ETFs close each year. I have personally experienced it and since it was a busy period in the office I was caught off guard at that time and I didn’t sell before it closed
The proceeds of ETF liquidation were ultimately paid but it took a few weeks before hitting my account which is always an opportunity cost
When you have pre-selected a fund, review its documentation and look for overall size, Class size may be misleading e.g. for a Swiss investor the €80mm size may seem small However, when looking at the overall size it is close to €2.5bn and one of the largest International Government Bond Funds
Closure risk is part of the risk of being an active market participant and new ETFs always have more commercial risk than large, more established Funds with long track record
You should pay particular attention to Assets Currency and Currency Hedging
The Trading Currency does not change the currency risk you are taking by investing in the underlying assets and thus, this currency also doesn’t have any influence on the overall ETF performance. The Fund Base Currency simply refers to the currency that a fund reports in and not the currencies of the underlying securities which you are exposed to
The TER (Total Expense Ratio) or OCF (On-going Charge Figure) is only the visible part of the total (ETF Provider related) cost and includes trading costs and management expenses
Tracking Difference is the True Cost of holding an ETF
If you primary goal is the long term performance of the ETF I’d focus on Tracking Difference but if you are buying and selling ETFs frequently you may also have a look at Tracking Error
Yes! It is not uncommon for some ETFs with higher TER/OCFs to outperform lower TER/OCF competitors using additional returns such as securities lending – e.g. Equity ETFs frequently make money and in fact outperform their benchmarks
When comparing funds, make sure:
Funds you are comparing have the same underlying benchmark
Funds have the same hedged currency
The length of the analysis is at least one year (longer is better)
Remember, these are ETF Provider related costs and still exclude external fees and taxes you may incur that are specific to your situation e.g. Broker platform fees and commissions, Bid/Ask Spread on purchase and sale and any taxes
Ultimately, the most relevant cost figure is the Total Cost of Ownership (TCO) that includes ETF Provider Costs and any external costs and taxes
Physical (full replication) – ETF holds positions in all companies as detailed in the index
Physical (sampling) – ETF holds positions in a relevant subset of the companies detailed in the index. The subset is chosen so that the performance of the fund matches the performance of the index as closely as possible
Synthetic – ETF uses a financial derivatives to replicate the performance of the index to investors
Irish-domiciled ETFs benefit from the US/Ireland double taxation treaty, which reduces standard withholding tax rates on US stock dividends from 30 to 15 per cent and – may prove beneficial if your ETF invests in US Assets
Luxembourg-domiciled ETFs are subject to the full 30 per cent tax rate for US Assets. However, Luxembourg does not charge any other taxes such as capital gains or dividend for non-resident investors of Luxembourg domiciled funds (you residency country still does, though) – depending on your tax residency this may be beneficial for non-US Assets
Distributing ETFs will pay dividends and generate regular income from your portfolio that you can spend if you need to
Accumulating funds will maximize your future returns as they automatically reinvest your income back into the market with no extra expenses (saves your time and reduces transaction fees)
Depending on your country of residence the choice may have tax consequences and a wise selection of ETFs may increase your returns
ETFs will usually be listed on multiple exchanges at the same time. Cross-listing allows to make ETFs accessible for local investors in multiple markets
Key ones include LSE, XETRA, Borsa Italia, Euronext and Six Swiss Exchange
Hi Raph,
Got the email for this one quite promptly, great read as always. Thanks for the mention, clarification and introduction to trackinsight!
Would be a great tool to utilize in my hunt for the perfect ETF (for me at least)!
Thanks.
Thanks, Jack. Let me know if something else doesn’t make sense.
Hi Raph, So, I went away and did some digging, and I got another (silly) question. As my broker profits’ off of spreads rather than a platform fee, would your advice be to go for a distributing ETF with a high volume and low spread (~5p which is ~0.06%) or an accumulating ETF with a slightly lower volume and higher spread (~11p which is ~0.10%). The ETFs intend to track the same index (VWRL and VWRP are two such examples) and all other variables seem to be the same. My intention is to re-invest dividends anyways, and the ETF will… Read more »
Hi Jack – No such thing as silly questions here – all comments welcome if I can help It also comes down to the other asset classes you have in your portfolio and the type of re-balancing because you can use dividends for that purpose as well. Don’t forget to take into account the frequency and amount of contributions you will make over time I would probably do a quick spreadsheet simulation to figure out what may be beneficial in the long run Good choice on the ETFs BTW 🙂 I just did a deep dive into World ETFs and… Read more »
Nice read! Now you gonna get some traffic from Poland 🙂
It seems to be getting some traction there, indeed 🙂
This is so cool!
Thanks, James
Hands down the best guide for Europeans! Congrats
Thanks, Miklos. Glad you get benefit from it!
Finally a decent non-US investment blog! Great work!
Thanks Tom!
Hi Raph –
Great how-to for ETF selection
All the best,
Nico
Hi Raph,
VEUD TRACKING DIFFERENCE +0.21%, TRACKING ERROR +0.09%
VDEM TRACKING DIFFERENCE -0.18%, TRACKING ERROR +0.25%
How to correctly understand TRACKING DIFFERENCE if one ETF + 0.21% and another -0.18%
Which is a better result?
Hi CureBear –
I just posted a quick summary to answer your question
Hope it helps,
Raph
Hi,
Thank you for this information,
Now everything is clearer. 🙂 But I found an article about tracking difference.
Have you done similar research due to inaccurate information?
https://fairvalue-magazin.de/etf-indexfonds/etf-vergleich/tracking-difference/
Hi CuteBear –
Can you please elaborate on the inaccuracy in the article so that I can help?
Raph
Great article. A few questions and a proposal 🙂
Hi Ambush –
(i) Best way to get this data is to check the ETF provider’s, in this case, iShares website – have a look at the Allocation section and you will get the Underlying Currency Breakdown
(ii) Correct, but it depends on how the provider calculates it. Usually these will be Total Returns (includes a combination of price change and paid dividends). For accumulating funds your reasoning is correct
(iii) I will revert on this question in due course.
Raph
Regarding your last, question this may help
thanks for this great investment resource! I especially like the European viewpoint. I don’t know if you’ve already written about this, but I couldn’t find any information about WHERE to buy world ETFs. For example the recommended vanguard VWRP sells in many (3+) European stock exchanges. Where do I buy it from? What are the considerations except for the currency exchange? Are automatically deducted taxes in Germany more than in UK? If you haven’t blogged about this already it seems to me it’s a good idea for a future article 🙂
thanks again
Hi Nikos –
Please see a comment here that answers you question
Raph
Hello, That’s my first comment, thus, forgive me if you have already addressed such questions. Based on your great arcticles, I’m building my first ETF portfolio ever (70% Equity, 30% Bonds) to start saving for my retirement (only 34 years left…). I’m wondering what’s your thought/suggestions on such ETFs: – IE00BGV5VR99 – IE00B1XNHC34 – IE00BYWQWR46 – IE00BYXG2H39 – IE00BFYN8Y92 Unfortunately, I’m European / Polish which narrow the number of available ETFs that I’m able to buy for retirement plan. PS: Love that we share the same passion which for me is ca. 70% road / 30% Enduro3 PS2: A Happy… Read more »
Hi Raph, Thank you for your hard work! Amazing blog, really. I have just got a question about the ETF domiciliation. Say I am from Poland and I bought iShares Core MSCI World UCITS ETF on XETRA. This ETF is Ireland domiciled, will I have tax obligation in Ireland or only in Poland, as my sole tax residency is in Poland? Poland and Ireland have a double taxation agreement and in Poland I would pay only capital gain tax. Am I missing anyting? Are there any other aspects that one should take into consideration when buying ETF domiciled in Lux… Read more »
Thanks, Erik.
I aim to provide more clarity on taxes but the short answer is you personally won’t have to pay anything in Ireland. If the ETF is domiciled in Ireland the fund does not withhold dividend taxes for e.g. Polish investors.
The fund will pay a withholding tax e.g. 15% for US dividends, though.