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.
In recent years it seems that investors have flocked to ETFs because they are easily tradeable, usually associated with passive investment strategies which attract low management charges.
For most investors, ETFs offer a lot 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.
Some Popular ETFs
Vanguard FTSE AW : This ETF seeks to track the performance of the FTSE All-World Index. This is a market-capitalisation weighted index of stocks of global large and mid-cap companies in developed and emerging countries.
iShares Core FTSE 100 UCITS ETF : This tracker ETF follows the FTSE 100 index – the 100 largest UK companies trading on the London Stock Exchange.
iShares Euro Stoxx 50 UCITS ETF – This tracker aims to reflect the return of the EURO STOXX50 Index. This is the benchmark index that measures the performance of the 50 largest companies in the Eurozone.
Vanguard S&P 500 : This tracker ETF tracks the performance of the Standard & Poor’s 500 Index, a widely recognised benchmark of US stock market performance that is comprised of the stocks of 500 large US companies.
Where Can You Buy ETFs in Ireland ?
In our recent article about Buying Shares in Ireland – we compared the share dealing charges of four online stockbrokers. (DEGIRO , Davy , Goodbody and Interactive Investors).
All of these stockbrokers will allow you to buy ETFs. Trading shares in an ETF will normally have the same costs as trading any other share.
We won’t repeat all the detailed figures here again – but you in our recent stockbroker 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
Tax on gains from ETFs is not the same as the taxation of gains on shares of individual companies.
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 – and outlined below.
- Taxation of Irish domiciled ETFs
If you opt for an Irish domiciled ETF, Irish residents 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. Taxation of EU (other than Ireland) domiciled ETFs
- UCITS : Most EU domiciled ETFs will have a UCITS, or EU regulated structure So – according to 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 % 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 will 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: Taxation of 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 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 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.
If there is no profit, no tax is payable.
Investment Trusts are funds that are publicly listed as companies on a Stock Exchange, and so are traded like shares. An Investment Trust will have shares in several companies and possibly investments in other assets.
By buying shares in an Investment Trust you are getting exposure to many different assets with just one investment . (In a similar way to Exchange Traded Funds) .
EFTs will typically track an Index (FTSE100 , S&P500 etc) – but Investment Trusts are typically invested in a smaller , handpicked selection of companies. As with all shares – their value can decrease as well as increase and you are at risk of loss.
Taxation of Investment Trusts
If you buy shares in Investment Trusts – there are no specific guidelines from Revenue on how they are taxed. But we understand that they are treated like any other share and that dividend income will be taxed at your marginal rate of income tax and any gains will be taxed at the CGT tax rate of 33%. (First €1270 of gain a year is exempt).
Investment Trusts are NOT treated the same way as ETFs for tax purposes.