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ETF's Explained And Key Takeaways

Earlier we described the key takeaways you need to know about what an ETF is here..

Below we describe the main providers, ETFs available in Europe, some of the most popular ETFs available and key takeaways to know before investing.


ETFs AVAILABLE FOR PURCHASE IN EUROPE

  • With the introduction to Undertakings for Collective Investment in Transferable Securities (UCITS) only ETFs that are classified as “UCITS” can be purchased in Europe on trading platforms.

  • ETFs that are not UCITS (US ETFs) that were purchased before the regulations came into effect can however be sold on European platforms.

  • Taxation for UCITS and non UCITS ETFs is different with non UCITS ETFs being taxed as a stock for dividends and capital gains purposes while UCITS ETFs are taxed as investment funds (see taxation below).

  • UCITS requires that certain information must be available in each EU Member State the ETFs is marketed in and include Key Investor Information Document ("KIID")


KEY PROVIDERS OF ETFs AND REAL WORLD EXAMPLES

Some of the largest ETF providers are


The website www.justETF.com providers a good platform to review ETFs and set up simulations of ETF investment plans JustETF also provides a full range of providers on this link https://www.justetf.com/en/etf-provider/


IShares has over 370 ETF funds with 30 “core” ETFs covering a broad range of diversified portfolios. Some of the more popular core IShares ETFs are:




CURRENCY AND SPREADS

  • Purchasing ETFs outside your base trading currency can incur exchange spread fees of up to 2% for a purchase in a difference currency and then again for the sale back to your base currency.

  • Therefore, where you have high spread fees (Degiro is low at 0.1%) you should aim to purchase Euro ETFs from a Euro account and Sterling ETFs from a Sterling account.

  • Many EFTs are available on a number of different exchanges, therefore, if you are holding a Euro trading account you should purchase the Euro version of the ETF on one of the liquid exchanges such as Xetra, Milan or Amsterdam.

  • The factsheet for each ETF lists the exchanges it is listed on and the ticker if different from main listing ticker.


ETFs AND TAXATION


UCITS ETFs

European regulated UCITS ETFs are taxed on the same basis as investment funds.

Gains are taxed at 41% and distributions (from dividends) are also taxed at 41% in the year of distribution. Similarly to investment funds, on the eight anniversary of purchase any gain up to this point is taxed at 41%, which can be offset from tax on total gain at time of disposal. Losses cannot be offset against gains on UCITS ETFs.

Non-UCITS ETFs

If you hold non UCTIS ETFs (purchased in advance of the EU regulations coming into effect) they are treated the same as shares.  Any capital gain (or loss) on disposal is taxed at 33% and distributions from dividend income is taxed as income at your marginal rate of income tax.  Capital losses can be off-set against capital gains on other investments.

Full information on Taxation for ETFs is available on the Revenue.ie website in this link in Part 27-01b-01.


INVESTMENT OPTIONS

ETFs allow you with one trade to have diversified portfolios in a range of themes. So for example if you want to invest in US banks, then select an ETF like the iShares S&P 500 Financials (Ticker QDVH on Deutsche Borse and IUFS on LSE) and 53% of your holdings is made up of the following with the remaining 47% across a large number of other financial institutions

  • BERKSHIRE HATHAWAY INC CLASS B 15.01%

  • JPMORGAN CHASE & CO 11.07%

  • BANK OF AMERICA CORP 7.26%

  • CITIGROUP INC 3.85%

  • BLACKROCK INC 3.28%

  • WELLS FARGO 3.26%

  • S&P GLOBAL INC 3.12%

  • AMERICAN EXPRESS 2.39%

  • GOLDMAN SACHS GROUP INC 2.27%

  • CME GROUP INC CLASS A 2.24%


An Emerging Market ETF of iShares MSCI EM UCITS ETF USD (Ticker EUNM on Xetra and SEMA on LSE) has 36.19% of its holdings in the following companies and the balance split over a large number of other companies with less than 1% in each.

  • ALIBABA GROUP HOLDING ADR REPRESEN 8.25%

  • TENCENT HOLDINGS LTD 6.07%

  • TAIWAN SEMICONDUCTOR MANUFACTURING 5.55%

  • ISH MSCI CHINA A ETF USD ACC 4.97%

  • SAMSUNG ELECTRONICS LTD 3.39%

  • ISHARES MSCI SAUDI ARABIA CAPPED 2.53%

  • MEITUAN DIANPING 1.85%

  • NASPERS LIMITED N LTD 1.27%

  • RELIANCE INDUSTRIES LTD 1.25%

  • CHINA CONSTRUCTION BANK CORP H 1.06%



The website JustETF provides details and options of a very wide range of ETFs available in Europe and is a great tool for simulating ETF investment strategies.


KEY TAKEAWAYS

  • An exchange traded fund (ETF) is a basket of shares that trades on an exchange, just like a stock.

  • An ETF is called an exchange traded fund since it's traded on an exchange just like stocks. The price of an ETF’s shares will change throughout the trading day as the shares are bought and sold on the market.

  • ETFs can contain all types of investments including stocks, commodities, or bonds; some offer U.S. only holdings, while others are international.

  • ETFs offer low expense ratios and fewer broker commissions than buying the stocks individually.

  • There are many providers of ETFs providing a wide range of diversified investment options.

  • Trading platforms in Europe offer UCITS ETFs, which are treated for tax purposes similarly to investment funds.

As always please note that the above does not constitute a recommendation and please do your own independent research before making any investments.


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