An Exchange Traded Fund (ETF) is essentially a portfolio of stocks managed by an investment professional and bought and sold through a stockbroker.
Shares in an ETF are listed on a stock exchange, just like individual companies. This gives individual investors an opportunity to buy and sell a portfolio of stocks, in the same way as if they were dealing in a single listed share.
For most investors, ETFs offer far more diversification than you’d ever hope to achieve by building your own portfolio of shares. ETFs are also generally much easier and cheaper to manage than a portfolio of self-selected shares.
If you just own a small handful of individual shares, a poor performance from one share will have a much larger impact.
Of course – as with any stock market-based investment there is always a risk of losing money.
- ETFs typically aim to track a specific stock market or index such as the FTSE 100 , FTSE 250 , ISEQ, S&P 500 etc.
- ETFs have charges built in to cover the fund manager’s operational costs. These charges tend to be very low, often below 0.2% a year.
- ETFs are very popular. As of 31 December 2016 there was more than €287 billion in just 688 Irish ETFs.
In our article about Buying Shares in Ireland – we compared the share dealing charges of four online stockbrokers. Trading shares in an ETF will usually have just the same costs any other share. We won’t repeat all the detailed figures here again – but in that comparison, DEGIRO came out as the cheapest way to buy shares in Ireland.
Some stockbrokers offer reduced fees for some ETFs.
DEGIRO, for example, offers commission-free trading in over 150 European ETFs. Every calendar month, the first trade executed in an ETF of their “Free ETF Selection” is free.
Taxation of ETFs
When you buy a single company share you will be taxed in 2 ways on any gains. If you get dividends you declare this to Revenue and pay your margin rate of tax on that income.
When you sell the shares you will be liable for Capital Gains Tax of 33% on any growth you achieved (above €1,270 per annum) . Taxation of ETFs is different – see below.
- Irish domiciled ETFs
If you opt for an Irish domiciled ETF, Irish resident individuals are subject to income tax at a special rate of 41% on all returns (dividends and gains) on a self assessment basis every 8 years either as a sale or “deemed sale”. No (PRSI) or universal social charge (USC) are applicable. Any losses are not available for offset .
- 2. EU (other than Ireland) domiciled ETFs
- UCITS : Most EU domiciled ETFs will have a UCITS, or EU regulated structure So – according to the Revenue, the tax treatment of these investments “mirror” that of Irish domiciled ETFs and will be are subject to exit tax at a rate of 41 per cent on both dividends and gains.
- Non UCITS : Some EU ETFs are which are non UCITS may fall outside the 41% income tax regime. Instead, they may be subject to capital gains tax (33%) and marginal rate income tax (up to 40%) plus USC (up to 11%) and PRSI (4%) .
Revenue is willing to consider submissions on a case by case basis and acknowledge that taxpayers may decide to take such a position in appropriate cases.
UCITS stands for Undertakings for the Collective Investment in Transferable Securities. This refers to a regulatory framework that allows for the sale of cross-Europe mutual funds. UCITS funds are perceived as safe and well-regulated investments and are popular among many investors looking to invest across Europe
3: US, EEA and other OECD domiciles
For ETFs domiciled outside the EU – Dividends are taxed at your marginal rate, gains at the CGT rate and loss relief is available.
Note : Irish investors have been restricted from purchasing US-domiciled ETFs since the introduction of the new PRIIPs regime on January 3rd 2019.
The Revenue rules on deemed disposal
If you have money in an investment fund or an ETF, you have to pay tax on the fund every 8 years. I.e. it is “deemed” that you made a disposal.
The tax paid is the tax due on any profit made on the 8th anniversary of the investment. At present, the tax is 41%. If there is no profit, no tax is payable. If the fund/ETF subsequently falls in value and you cash in the fund, you can submit a claim to the Revenue for overpaid tax due to deemed disposal.