Whenever you request guidance on how to invest to reach FIRE, you will often receive the comment you should invest in Emerging Markets e.g. through IWDA + EMIM. But should you?
1. How to Buy US ETF in Europe with PRIIPs ETF Regulation?
Last Updated on September 4, 2020 by Mr. FightToFIRE
Most retail investors that trade on their own already noticed starting 2018. As a European, it’s not possible to buy US-based Exchange Traded Funds (ETF) anymore.
If you were trying to find out how to get these US-based ETFs in Europe, I hate to burst your bubble, but there is no straight forward for this after a new ETF regulation in Europe (no, options aren’t straightforward). The major culprit? PRIIPs.
PRIIPs stands for Packaged Retail and Insurance-based Investment Products. Phew, that’s a mouthful, isn’t it? No wonder everyone uses the abbreviation.
But what do these fancy words mean? According to Investopedia:
The term PRIIPs, created by the European Commission to regulate the underlying market, is defined as any product that is manufactured by the financial services industry, to provide investment opportunities to retail investors, where the amount repayable is subject to fluctuation because of exposure to reference values or the performance of underlying assets not directly purchased by the retail investor.”
Investopedia defined PRIIPs, but it doesn’t answer why it affects European investors.
JustETF has a solid article answering why the EU has this directive. The article has a clear message and you notice this. It answers why US ETF’s aren’t an outstanding idea and why PRIIPs ETF regulation is thus good for the retail investor. I will not argue about whether PRIIPs ETF regulation is a good or bad thing for Europeans. It’s too late anyway and as a retail investor, we aren’t able to make a change anyway.
Instead, I’ll help in another way by answering the questions:
- As a European investor, why can’t I invest in US-based trackers or ETFs?
- How to buy US ETF in Europe?
- What are some alternatives to the most bought US funds?
PRIIPs: no KID, no fund
PRIIPs requires funds, so both active and passive, to provide a Key Information Document (KID). This KID enables investors to assess the risk, reward, and costs in one swift read.
Because it’s a European regulation, European funds were ready by the time the new rules came into effect. Without it, they wouldn’t be allowed to be public after all.
US-based ETFs didn’t bother to comply as their focus is the US. Creating this EU approved documentation wasn’t and still isn’t a priority for them, nor will it ever be. It’s also very likely a money thing, why allow your European investors the access to a cheap tracker when you can just let them enjoy a more expensive one?
Unfortunately, as a result of this decision, EU brokers don’t make the US-funds that don’t offer a KID to their clients available.
How to buy US ETF in Europe
Now we have identified the consequences of PRIIPs ETF regulation for Europe.
So let’s go to the Fight to FIRE step by step guide how to buy US ETFs in Europe:
- Figure out what type of investor you are by doing your due diligence. Before you invest in general, and not just in US ETFs from Europe, know your risk threshold for crazy market movement and investment horizon.
- Open an account at one of the many online brokers that offer low commission trading and gives an easy and user-friendly platform. The biggest one is DeGiro, available in 18 countries (Degiro, 2020). There are others that allow European to invest in US ETFs from Europe. For Belgium, and 9 other countries, there is Lynx (Lynx, 2020).
- Got your account? Fund it with the amount you want to risk and can miss for a longer time (remember 1?).
- Research what you want to invest in. You can read what I have in my portfolio and what I think of thematic funds or dividend aristocrats. But there is tons of info out there, so be careful and question everything! Look at regions, sectors, themes as mentioned above, and much more. There is an ETF for everyone’s taste.
JustETF.com is an excellent site with a plethora of information including the symbol (AKA ticker) or code. Either way, think long term and follow your risk appetite.
To help you out, some more tips on what to look for when you want to buy US ETF in Europe:
- Pay attention to the expense ratio and keep an eye on their size. The lower the expenses the better, though there is much more to it.
- The domicile and currency of the respective ETF you want to trade with. Domicile is the “home country” of ETF. ETF taxation varies according to domicile. It’s also country-specific, so you have to do your due diligence here. If you wish to invest in US index funds from Europe, you will probably end up with a fund domiciled in Ireland.
Finally, the currency is important to avoid conversion fees, choose the ETF, and broker with the same currency as your account.
- Purchase the (US index) ETF based on your research and using either ISIN code or the ticker of the ETFs. That way you get exactly the one you wanted.
European alternatives for US-based ETFs
You might have noticed I use “US-based“. While you can’t buy US-based ETFs, you can still buy US index ETFs. Let me clarify.
The former are trackers with a listing in the US such as SPY. This ETF tracks the S&P500 index and has an ISIN code starting with ‘US’ (US78462F1030). However, since it tracks an index, nothing is stopping a fund to be listed in Europe (if it follows PRIIPs) but still track a US index just like SPY. An example of this is CSPX. Instead of having an ISIN code starting with ‘US’, this tracker’s ISIN starts with ‘IE’ (IE00B5BMR087).
So, since brokers aren’t allowed to make US-based funds available these huge fund firms provide European alternatives to these very large and highly liquid US exchange-traded funds.
For most US ETFs there is a European alternative ETF that is equivalent to the US ETF. That way it is possible to buy US ETFs for European investors.
Naming all of them is outside the scope of this article, but below are some of the most popular funds and their European counterpart. Of course, these EU-domiciled funds aren’t nearly as big and might be a tad bit more expensive, but there is no alternative for the retail trader if they want to invest in US ETFs from Europe. We’ve got to make do with what we have.
As mentioned earlier in my steps on how to buy US index trackers, since European traders are forced into lesser-known funds and thus more often than not, smaller funds, you do have to take their size into consideration.
The popular American trackers don’t have this concern and it becomes apparent when you look at the size of the below-mentioned funds.
Let’s take IBB and SBIO. IBB has a hefty 8.15 billion dollars in Assets. SBIO? 345.48 million dollars. Bit of a difference no? Of course, biotech is still pretty popular, so even the lesser-known Invesco NASDAQ Biotech fund still has a comfortable amount of Assets. Others on the other hand, not so much. Take the SPDR MSCI Europe Telecommunications UCITS ETF. It currently sits at 5.93 million EUR in assets. This is very low. I’m not saying it’ll disappear tomorrow, but it certainly isn’t a fund you want to consider if you want to focus on telecommunications.
For the ones mentioned below their size isn’t a concern just like with most fonds, but you have been warned.
All the above-mentioned ETFs have a link to justETF that has a large (public) database of various trackers that are located in Europe. An additional benefit is that they allow you to filter on the fund’s domicile country.
I highly recommend you take a look on their site if you are interested in a certain fund.