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PRIIPs Regulation Printed On The Side Of A Ring Folder

How to Buy US ETFs as a European with PRIIPs Regulation

Last Updated on January 27, 2022 by Mr. FightToFIRE

Most European retail investors trading on their own already noticed early in 2018. As a European, it’s not possible to buy US-based Exchange Traded Funds (ETF) anymore. Funds such as SPY, IVV, QQQ, VT, and many others are unavailable. The major culprit? PRIIPs, which stands for Packaged Retail and Insurance-based Investment Products. So what can we do? Well, let us have a closer look.

First of all, what does PRIIPs 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.com

That’s the definition of 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 suitable 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 retail investors, we cannot make a change regardless.

Instead, I’ll help in another way by answering the questions:

  1. As a European investor, why can’t I invest in US-based trackers or ETFs?
  2. How to buy a US-focussed ETF in Europe?
  3. What are some alternatives to the most bought US funds?

Risk disclaimer: Investing involves risk of loss.

PRIIPs: why a European investor can't invest in US-based ETFs

PRIIPs require 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 quick read.

Because it’s a European regulation, European funds were ready when 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 access to a cheap tracker when you can just let them enjoy a more expensive one?
Unfortunately, EU brokers don’t make the US funds available that don’t offer a KID due to this decision.

How can a European investor buy US index funds?

Before we jump into buying trackers, make sure you have a brokerage account.

o, if you haven’t done so already, follow this step by step guide on setting up an account to hold funds:

  1. 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.
  2. 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). Others allow European to invest in US ETFs from Europe. For Belgium and 9 other countries, there is Lynx (Lynx, 2020).
  3. Got your account? Fund it with the amount you want to risk and miss for a longer time (remember 1?).
  4. Research in what you want to invest. 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 many 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:
    1. Please 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.
    2. 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 essential to avoid conversion fees, choose the ETF, and broker with the same currency as your account.
  5. Purchase the (US index) ETF based on your research and using either the ISIN code or the ticker of the ETFs. That way, you get exactly the one you wanted.

European alternatives for US-based ETFs

Once you have set up a brokerage account and decided not to go with a US broker you can still invest in US indices through different means.

Take SPY, a US tracker. It has an ISIN code starting with ‘US’ (US78462F1030). What this tracker does, is track the S&P500 index. However, since it tracks an index, nothing stops another fund listed in Europe from doing the same (if it follows PRIIPs) 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 giant fund firms provide European alternatives to these vast 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 is beyond this article, but below are some popular funds and their European counterpart. Of course, these EU-domiciled funds aren’t nearly as significant 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.

Concerns

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 consider their size.
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’re going to focus on telecommunications.

Their size isn’t a concern for the ones mentioned below, just like with most fonds, but you have been warned.

Taxes

Another concern is the matter of taxes. Depending on your home country, you may miss out on tax deductions if you take European funds that are accumulating.

Thus it’s always important to keep your home country’s tax situation into account when looking into ETFs.

But what if I really want to buy US-based trackers in Europe?

So, regulations prevent Europeans from buying US-based funds, but what if you really want to get SPY, VTI, or QQQ?

There is a way to get access to US trackers that don’t comply with European regulations if you want to trade those:

Register with a US broker!

While it sounds simple, you have to realize that these brokers do not comply with EU regulations, and thus you will have to do all the work yourself. This means:

  • Make sure you provide all the necessary documentation
  • Deposit all the owed taxes on time
  • Inform your tax service of your foreign account (for Belgians)

Having all the paperwork in order is very important. You won’t be exempt from a 30% dividend tax US brokerages take if you miss filling in the W-8BEN form (aka the Certificate of Status of Beneficial Owner for United States Tax Withholding and Reporting form).

If you are unsure if your country has a tax treaty with the US, you can find more info on the website of IRS.

Not scared away by this extra administration? Then here are trustworthy American brokers to start investing in US-based ETF or trackers:

Realize that this changes frequently and that some brokers that accepted Europeans in the past, don’t anymore.

ETFs for European investors

US-based ETF

European alternative ETF

SPDR S&P 500 ETF – SPY

iShares MSCI Emerging Markets ETF – EEM

Financial Select Sector SPDR Fund – XLF

iShares Nasdaq Biotechnology ETF – IBB

iShares Russell 2000 ETF – IWM

Looking for a list of European alternatives to popular US ETFs?

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.

Take a look at my portfolio to see what kind of funds I have that do follow PRIIPS.

Sources:

I'm a developer for a major financial institution in Belgium that is present in over 40 countries. I have over 8 years of working experience in the development of customer applications focussing on all aspects of banking. This helped me gain a deep understanding of the inner workings of a commercial bank. All of this experience in both banking and life culminates in this blog about personal finance and my fight towards FIRE.

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1. How to Buy US ETFs as a European with PRIIPs Regulation
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3. How PSD2 will make banking more beneficial for you
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andre

Thanks man! Saved me from lots of frustration:)
You got a new subscriber to your blog:)

Gerd Wilhelmi

This may be fine for EU Citizens that don’t have US Citizenship; but if you do (so you have tax liability in the US) and you buy any EU based Fund or ETF, you are exposed to IRS PFIC rules that are extremely laborious (therefore expensive) and error prone (therefore dangerous) and likely wipe out any potential gains just by taxation and compliance fees.

On the other hand PRIIP seems to also apply to EU residents that do have US citizenship (even temporary expats, which makes no sense), so the US Brokerages refuse to sell them ETFs or Funds citing missing KIDs for any of the US based products.

What alternatives would you recommend to an Expat US citizen living in Europe ?

Thank you !

Giancarlo

Dear Mr FightToFire,

This information is priceless – Thank you very much for sharing – I am forced to close my recent opened US based broker account for this very same reason, I am not able to purchase ETF’s. – They suggested to purchase the ETF via Options and Futures…. not a thing for me.
Is the only solution to hire an US based broker which will purchase on my behalf ? or commission will kill me ?
Thank you for some light in this darkness..

Apelsyna

Thank you, Mr.FightToFIRE.
Very useful information.
I wish you all the best in what you are doing.

Teodor

Hi,
I managed to buy through eToro a couple US based ETF (VTI, VOO) – like 1500 ISD worth!

Then I came to you r article and it made me understand I shouldn’t be able to buy those ETF.
What you advise me to do now?
Sell all? Or how can I get myself out of this?

Thank you!

Henry

Hi, you mention it is not possible to buy us based etfs in Europe, which is true. However, you can still buy them in the US instead. You register an account with a US broker and buy them so that EU regulations don’t apply. Best solution when there are no alternative funds, like for ARKK. europoor.com has instructions

Anonymous

It’s actually bad to buy EU-based ETFs instead of US-based ETFs if the ETFs invest in US-based companies.

US-based ETF: When a company pays dividend, the US dividend withholding tax (usually 15% for Europeans) is paid by the investor. Since the withholding tax is paid by the investor, you may deduct an amount equal to the withholding tax from your own country’s dividend tax (at least if you’re a Swedish tax subject).

EU-based ETF: When a company pays dividend, the US dividend tax is paid by the ETF. The rate depends on the domicile of the ETF, for example 15% for Irish ETFs or 30% for Luxembourg ETFs (check the country code in the ISIN). Since the withholding tax is paid by the ETF, you as the investor may not deduct the withholding tax from your country’s taxes. The ETF does not pay any taxes against which this could be deducted from. Therefore, the dividend withholding tax indirectly becomes an extra fee for holding the ETF (equal to 15% or 30% of all dividends paid to the ETF).

These tax problems are in no way exclusive to US-based ETF. As a rule of thumb, the ETF should be domiciled in the same country as the ETF’s investments.

Is it possible to use physically settled futures and options with US ETFs as the underlying security? Can you enter futures contracts or sell put options and will EU brokers allow the underlying instrument to be delivered or will the derivative instrument be forcibly closed before the date of maturity? If you buy call options, are you allowed to exercise the options?

Anonymous

So it’s more complex than I thought. If the investor lives in Sweden, then the withholding tax paid by the Irish ETF indirectly acts as a hidden extra fee of about half a percent which doesn’t apply if you invest in a US ETF, assuming the dividend is approximately three percent of the share capital.

If you own US-based ETFs when you die, then you have to pay US estate tax. Ireland does not charge estate tax or inheritance tax on IE-based ETFs and there is no longer any inheritance tax in Sweden, so that’s another thing to consider.

Daniel

Thanks for the information. I live in Peru and hold an account for several years on E*Trade where I can buy any US ETF. Now I’m moving to Spain and will become a local resident for tax purposes. I will still be able to use my E*Trade Account, but, from a local tax and EU reglations stand point – is there any restriction or penalty for a local resident to buy US ETFs directly ? I’ve not clarity if the restriction is for US Brokers to offer them this US ETFs to EU residents or is it for the local residents to buy themsecond question.. I understand that Interactive Brokers offer US ETFs on the EU version… as Degiro… from a retail investor resident in the EU perspective, is Interactive Brokers a valid option for the European US ETF alternative ? Thanks in advance

Daniel

Hi, for a European resident, is it the same to buy the European alternatives for US-based ETFs form an Ireland or Luxemburg or Germany domicile fund, as far as it’s a European Country ?

Juan

What about which stock exchange you use to buy/sell ireland or Luxembourg domiciled ETF, Frankfurt, Paris, Amsterdam, do they have tax effects?

Dave

Hi, great article i also live in Belgium and want to buy TLT ETF, i found 2 alternatives IDTL and DTLA, the difference is Distributing or Accumulating, does that make any differences for taxes?

Dave

Hi, thank you for this post, I’m Belgian too, do you think it’s best to buy Accredited or Distributed shares in Belgium/Europe taxwise?

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