What is an ETF ?
An Exchange Traded Fund (ETF) is essentially a portfolio of shares managed by an investment professional. Shares in an ETF can be bought and sold through a stockbroker just like shares in any company.
Shares in Exchange Traded Funds are listed on stock exchanges, just like shares in individual companies. ETFs can provide individual investors with an opportunity to buy a varied portfolio of stocks, in the same way as if they were dealing in a single listed share.
An ETF, sometimes referred to as a tracker, is a product that follows an index, a commodity, or a composition of products. You can think of it as a “basket” of shares.
In recent years, it seems that investors have flocked to ETFs because they are easily tradeable and usually have low management charges.
Diversification with ETFs
ETF s can be an easier and more cost-effective way for investors to achieve returns from say the S&P 500 or the FTSE 100 without having to purchase all the individual stocks. They offer a convenient alternative to purchasing all of the underlying securities of a particular index. For most investors, ETFs offer a lot more diversification than you’d ever hope to achieve by building your own portfolio of shares.
Exchange-Traded Funds are also generally 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.
- 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.
Of course – as with any stock market-based investment there is always a risk of losing money.
Choosing Accumulating or Distributing ETFs
There are two types of ETFs
- Distributing (DIST): they pay the dividends of the holdings to the investors.
- Accumulating (ACC): they reinvest any dividends to buy other stocks.
This has implications for taxation because there is a 41% tax on ETF dividends in Ireland. More about ETF taxation further down the page.
Some Popular ETFs
Vanguard S&P 500 : This tracker ETF tracks the performance of the Standard & Poor’s 500 Index that is comprised of the stocks of 500 large US companies.
Vanguard FTSE AW (All World) : 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 MSCI World Broad exposure to a wide range of global companies within 23 developed countries. Covering 85% of the listed equities in each country.
iShares FTSE 100 : This tracker ETF follows the FTSE 100 index – the 100 largest UK companies trading on the London Stock Exchange.
iShares Euro Stx 50 – 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.
How To Buy ETFs in Ireland ?
If you take a look at our article about Buying Shares in Ireland – we compare the fees charged by some online stockbrokers available in Ireland. All the online brokers in the comparison will allow you to buy ETFs.
(DEGIRO , Davy , BUX Zero, Goodbody, Interactive Brokers and eToro )
Some brokers will have a smaller selection of ETFs than others. Trading shares in an ETF will normally have the same brokerage fees as trading any other share.
DEGIRO usually offers commission-free trading on several European ETFs. Terms and Conditions apply – See Here .
The popular ETFs listed above were all in the DEGIRO free selection at the time of writing.
If you stick to their selection of commission-free ETFs – Degiro will definitely be the lowest priced option.
Tip – With DEGIRO – Buy from one exchange (Amsterdam / Paris etc) to save paying multiple annual exchange fees of €2.50.
Bux Zero is a mobile trading app available in Ireland with a small number of EU ETFs available.
Commission is €1 per trade. However , customers can also opt for a ” Zero Order” trade – which will be commission-free.
NB – Zero Orders will be executed at the end of the trading day, between 4 and 5 pm (Central European Time). Orders placed after 4 pm (CET) will be executed on the following day. If the price differential at the trade exceeds 5% for sell orders or 4% for buy orders, the zero-order is cancelled.
(Important :- Etoro only allows ETFs to be bought as a non-leveraged CFD – so there may be extra charges with them.)
Please note that Investing involves risk of loss.
What is UCITS ?
Many ETFs will have the letters UCITS mentioned in their name.
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.
Taxation of ETFs in Ireland
Taxation of Irish and EU domiciled ETFs
- You are supposed to declare the purchase of an ETF on your self assessment tax return to Revenue.
- Any dividends you receive from an ETF are subject to 41% tax. However, many ETFs accumulate dividends instead of paying them. Therefore, buying “Accumulating” ETFs rather than “Distributing” ones will simplify your tax returns and increase your overall return slightly.
- When/If you sell an ETF you will be liable for 41% income tax on any gains made. It doesn’t matter if you keep the money with your brokerage, you still need to pay the tax on the gains.
- If you don’t sell your ETF – then every 8 years you will be “deemed” to have sold it and will be liable for tax at 41% on any gains in the preceding 8 years. Whenever an actual disposal of an ETF subsequently occurs, a tax credit is given for the tax paid on the deemed disposal.
If the ETF subsequently falls in value and you cash it in , you can submit a claim to the Revenue for overpaid tax due to deemed disposal.
- All gains from ETFs (actual or deemed) including dividends, should be declared on your self-assessment tax returns each year.
- Any losses on other ETFs are not available for offset. So if you make a loss of €5000 on one ETF over 8 years – but make a gain of €10,000 on another over the same period – you will be liable for 41% tax on €10,000. You cannot deduct the €5000 loss.
- PRSI or universal social charge (USC) are not due on ETF gains.
Taxation of US, EEA and other OECD domiciles ETFs
With ETFs domiciled outside the EU – they are treated like individual shares for taxation purposes in Ireland.
a) If you get dividends you declare this to Revenue as income and pay your margin rate of tax on that income.
b) When you sell the ETF you will be liable for Capital Gains Tax of 33% on any profit above €1,270 per annum. More here on CGT on Shares
Note : Irish investors have been restricted from purchasing US-domiciled ETFs since January 3rd 2019.
Investment Trusts Vs ETFs
Investment Trusts can be seen as an alternative to EFTs.
Some people prefer them because the tax on Investment Trusts is lower than on ETFs.
An investment trust or investment fund is made up of a collection of underlying stocks or other financial instruments. However, an investment trust/fund will be actively managed by a fund manager. This means that the contents of the fund are often reviewed and can change over time. The charges for an actively managed fund will be higher than that of a passively managed tracker/ ETF . Charges on an investment trust tend to range between 0.5% – 2.00%. Like trackers, these costs will usually be included in the price of the product.
Investment trusts are funds that are publicly listed as companies on a Stock Exchange, and so are traded like any company shares. 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 or other assets/bonds/gold etc. As with all shares – their value can decrease as well as increase and you are at risk of loss.
Some popular UK based Investment Trusts include:- Scottish Mortgage Investment Trust (SMT), Edinburgh Worldwide Investment Trust , MONKS INVESTMENT TRUST and Templeton Emerging Markets Investment Trust
Since Brexit – it seems that a few of the UK investment trusts may be no longer available on Degiro for Irish customers. We are not sure if this is a permanent charge.
SMT was still available on Etoro at the time of writing.
Taxation of Investment Trusts
If you buy shares in Investment Trusts – there are no specific guidelines from Revenue on how they are taxed in Ireland. But we understand that they are treated like any other share and that any 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). (This is our opinion – and not financial advice)
Investment Trusts are NOT treated the same way as ETFs for tax purposes.