Exchange-traded funds (ETFs) are an easy way to invest in the stock market. They can provide attractive returns while offering better diversification and potentially lower risk than individual stocks.
So, if you’re looking for a way to invest in the stock market that is easy, diversified and low cost, ETFs could be a good option for you. And if you’re looking for a broker to help you get started with ETF investing, Europe has no shortage of great options.
Here are the best ETF brokers in Europe for long-term investors and why they’re worth considering.
What exactly is an ETF and why are they so popular?
An ETF is an investment fund that tracks an index like the S&P 500, a basket of assets, like gold and silver, or a specific sector, like electric vehicles. Unlike individual stocks, which can be quite volatile and risky, ETFs offer the potential for lower risk because they are diversified across many different holdings in the index.
ETFs are traded on exchanges and can be bought and sold just like stocks. And because they’re traded on exchanges, you can use almost any online broker to buy and sell ETFs during market hours. You’re given diversification over the market or sector from the first share you purchase, instead of betting on a single company.
Another reason why ETFs are so popular is because they’re often very affordable. Many ETFs have low expense ratios, which means it doesn’t cost much to own them. The largest ETFs are passive index funds, which means that a fund manager isn’t actively picking stocks and trying to beat the market. Instead, these funds simply track an index, leading to lower fees and a more accurate representation of the market.
The best ETF brokers in Europe
Remember, the best ETF broker for you will ultimately depend on your individual needs, preferences, and where you live. With that said, here are a few of the best ETF brokers in Europe that are excellent for long-term investors.
How do ETFs work?
Exchange-traded funds work like this: A fund, like BlackRock or Vanguard, buys a bunch of assets (for example, shares in all the companies in the S&P 500 index) and then divides these up into shares. These shares are then sold to investors. So, when you buy shares in an ETF, you’re buying a tiny piece of all the underlying assets within the fund.
Here’s a more simplified look at how ETFs work:
- Let’s say the BlackRock iShares S&P 500 ETF wants to track the performance of the S&P 500 index. To do this, the fund will buy shares in every company in the index, in the same proportion as they are represented in the index.
- So, if Apple is the largest company in the S&P 500, BlackRock will buy more shares of Apple than any other company. And if General Electric is the smallest company in the S&P 500, BlackRock will buy fewer shares of GE than any other company.
- BlackRock then bundles all these shares together as funds and sells the funds to investors in the form of ETF units on exchanges. So, when you buy units of the BlackRock iShares S&P 500 ETF, you’re buying a tiny piece of every company in the S&P 500 index.
Exchange-traded funds are named so because they are traded on exchanges, like stocks. And just like stocks, the price of ETF units can go up or down depending on the performance of the underlying assets. If Apple is the largest company in the S&P 500, for example, the BlackRock iShares S&P 500 ETF price will go up as Apple shares go up, and conversely.
European ETF examples
There are many fund providers in Europe, such as iShares, Vanguard, and Lyxor. And some ETFs track all sorts of indices, from the major stock market indices like the MSCI and FTSE, the S&P 500 or the FTSE 100, to more specific sectors like healthcare or tech.
Some of the most popular ETFs among European for global stocks investors include:
- Vanguard FTSE All-World UCITS ETF
- iShares MSCI World UCITS ETF
- Lyxor MSCI World UCITS ETF
These ETFs track the performance of all the stocks in the world. The FTSE All-World UCITS ETF, for example, tracks the performance of over 3,800 stocks from 45 countries. The MSCI World UCITS ETFs track the performance of around 1600 stocks from 23 developed countries.
Historically, global stocks have underperformed their US counterparts. For this reason, many investors prefer to invest in US stocks exclusively. The simplest way to do so is to buy an ETF that tracks the performance of the S&P 500. In Europe, the most popular ETFs that track the S&P 500 are:
- iShares Core S&P 500 UCITS ETF
- Lyxor S&P 500 UCITS ETF
- Vanguard S&P 500 UCITS ETF
These ETFs track the performance of the S&P 500 index, which is made up of 500 of America’s largest companies. These are just a few examples of ETFs with large trading volumes. Be aware that are just a few examples and that the best ETF for you will depend on your situation, including your investment goals and where you live.
Benefits of ETFs
ETFs can be beneficial because they are an inexpensive way to get exposure to a broad range of assets. Instead of buying shares in a bunch of different companies, you can purchase units in an ETF and get exposure to all the underlying assets at once.
Another benefit of ETFs is that they offer diversification, which can help reduce risk. When you invest in an ETF, you’re buying a tiny piece of every asset within the fund. So, suppose one company within the fund underperforms. In that case, it’s not going to have a significant impact on the performance of the ETF.
Furthermore, ETFs rebalance when their underlying assets move, so they’re constantly buying and selling shares to maintain the correct weightings. Assume an investor had to rebalance their portfolio manually, he would incur large trading costs. Because the funds behind ETFs do so automatically, these costs are eliminated.
Lastly, exchange-traded funds have low expense ratios, which means it doesn’t cost much to own them. An expense ratio is an annual fee that a fund charges its investors. This can be as low as 0.05% for some ETFs. The largest ETFs are passive index funds, which means that a fund manager isn’t actively picking stocks and trying to beat the market. Instead, these funds simply track an index, which is why their fees are so low.
Drawbacks of ETFs
Just like anything else, exchange-traded funds have their drawbacks. One is that ETFs can provide lower returns than individual stocks. If you own an ETF that tracks the S&P 500 index, for example, your returns will match the index. However, that performance might not beat the returns of an individual stock that outperforms the S&P 500.
Depending on the investor’s country of residence, some ETFs might also be subject to foreign withholding taxes. This means that a portion of the dividends and capital gains from the ETF will be withheld by the government of the country in which it’s held and not paid to the investor. In Europe, Ireland and Luxembourg are the two countries where most funds are domiciled because they have favorable tax agreements with the U.S.
Assume an investor lives in a country that taxes funds higher than individual stocks. This is generally the case for investors residing in Ireland. Here, unrealized gains from funds are taxed every eight years even if the investor doesn’t sell, whereas gains from stocks are only taxed when they’re sold. In this scenario, it might be more beneficial to buy individual stocks instead of ETFs or invest in something entirely different, like property.
Types of ETFs
The most predominant ETFs are those tracking the major stock market indices, like the S&P 500 in the US or the FTSE 100 in the UK. But there are ETFs for almost every asset class imaginable. Since the first ETF was created in 1989, the range of ETFs has exploded, and there’s now an ETF for just about everything.
Now, some ETFs track commodities like gold or oil. Some ETFs track bonds, like government bonds or corporate bonds. There are even ETFs that track other ETFs, so-called “ETFs of ETFs.”
Market ETFs are a type of ETF that tracks the performance of a particular stock market index. So, for example, there are ETFs that track the S&P 500, the FTSE 100, and the Nikkei 225.
This makes market ETFs a very popular way to invest in the stock market. Because they’re so closely tied to the stock market’s performance as a whole, they offer investors a straightforward way to get exposure to the markets. This means that if the stock market as a whole goes up, so do these ETFs. And if the stock market as a whole goes down, so do these ETFs.
A stock-exchange-traded fund is a type of ETF that tracks a particular portfolio of equities. For example, a stock ETF might track the performance of the best 50 stocks in the S&P 500 rather than the entire S&P 500 index. Other stock ETFs track the tech industry or renewable energy companies.
This type of ETF is a little riskier than market ETFs. Still, they can also offer investors potentially higher returns if the growth potential is larger in its selection of stocks. Because stock ETFs invest in individual stocks, they are more volatile than market ETFs and can go up or down much more significantly in value.
Bond ETFs are a type of ETF that tracks the performance of a portfolio of bonds. For example, a bond ETF might track government, corporate, or even high-yield bonds.
Bonds are similar to funding a loan: you buy debt from a borrower – the French government, for example, promises a specific interest rate in return, called the coupon rate, until the bond matures and the principal amount is paid.
Bond ETFs are seen as less risky than stock ETFs because bonds are generally more stable in value than stocks. However, bond ETFs have underperformed significantly in recent years as interest rates have risen. When interest rates go up, bond values erode in inverse proportion. This is why investors sell off their bonds before a projected rise in interest rates.
Commodity ETFs are a type of ETF that tracks the performance of a portfolio of commodities. For example, commodity ETFs might track the price of oil, gold, or silver.
This type of ETF can be very volatile because commodities are often subject to large swings in price. However, they can also offer investors potentially high returns if the underlying commodity experiences a price rally. For example, during the supply crises of 2022, the price of oil skyrocketed, and investors who had invested in a commodity ETF that tracked the price of oil would have seen their investment increase significantly.
The foreign exchange (FX) market is where currencies are traded. The FX market is the largest and most liquid market globally, with more than $ trillion daily turnover.
A currency ETF is a type of ETF that tracks the performance of a portfolio of foreign currencies. For example, there are currency ETFs that follow the euro, the Japanese yen, or the British pound.
Currency ETFs can be a helpful way for investors to gain exposure to foreign currencies. They can also provide a hedge against the risk of movements in currency exchange rates. For example, if an investor is concerned that the dollar’s value might decline relative to the euro, she could invest in a currency ETF that tracks the euro.
Emerging Market ETFs
Emerging markets are those countries that are in the process of developing their economies. Examples of emerging markets include Brazil, China, and India.
Emerging market ETFs are a type of ETF that tracks the performance of a portfolio of stocks from emerging markets. For example, an emerging market ETF might track the best 30 stocks from Brazil, China, and India.
Emerging market ETFs can be riskier than other ETFs because emerging markets are often more volatile and less predictable than developed markets. However, they can also offer investors potentially higher returns as these economies grow.
Sector ETFs are a type of ETF that tracks the performance of a particular sector of the stock market. For example, there are sector ETFs that track the technology sector, the health care sector, or the energy sector.
This type of ETF can be useful for investors who want to focus their investment on a specific area of the stock market. For example, an investor who is bullish on the technology sector might invest in a tech sector ETF.
Sector ETFs can be riskier than other types of ETFs because they are more exposed to the ups and downs of a specific sector. However, they can also offer investors potentially higher returns if the sector performs well. Renewable energy and electric vehicle ETFs, for example, have performed relatively well in recent years. However, it’s possible that this outperformance could return to the mean once the sector matures.
Leveraged ETFs are a type of ETF that tracks the performance of a particular index or sector but with a leveraged multiplier. For example, there are leveraged ETFs that track the S&P 500 Index with a multiplier of two times the return. ProShares UltraPro Short QQQ SQQQ, the most heavily-traded U.S. ETF, is an example of a leveraged ETF. This ETF tracks the Nasdaq-100 Index with a multiplier of three times the return.
Leveraged ETFs can be riskier than other types of ETFs because they magnify both the ups and downs of the underlying index or sector.
Assume a scenario in which an investor invests €100 in a 3x leveraged ETF. Consider what would happen if the benchmark index’s price rises 5% one day and falls 5% the next trading day. The 3x leveraged fund spikes 15% and drops 15% in a two-day period. The money invested on the first day is worth €115 after the first day of trading has ended. On the following day, when trading closes, the initial investment is worth €97.75.
Inverse ETFs are a type of ETF that tracks the performance of an underlying asset but with an inverse or opposite multiplier. Investors buy this type of ETF when they expect the underlying asset’s price to decline. For example, there are inverse ETFs that track the S&P 500 Index with an inverse multiplier of two times the return. As such, inverse ETFs are similar to short-selling the underlying asset.
Passive vs. active ETFs
ETFs are generally considered a passive investment vehicle because they track an index or sector without human intervention. However, there are also active ETFs, which are managed by a portfolio manager who actively buys and sells stocks in an attempt to outperform the underlying index or sector. Active ETFs generally have higher fees than passive ETFs because of the additional management required.
Remarkably few fund managers have consistently outperformed their benchmarks over long periods. As such, many investors believe that it makes more sense to invest in a passive ETF that tracks an index or sector rather than paying higher fees for an active ETF that may or may not outperform the market.
How to pick an ETF
Although most ETFs seem relatively similar, there can be significant differences between them. As such, investors must do their homework before investing in an ETF. When looking for an ETF to invest in, here are some things to consider:
- The benchmark. The first thing to consider is the benchmark that the ETF tracks. For example, an ETF that tracks the S&P 500 Index will generally have a different risk/return profile than an ETF that tracks the MSCI Emerging Markets Index.
- The fund provider. The second thing to consider is the fund provider. Some ETF providers, such as BlackRock and Vanguard, are very well-established with a long track record. Others, such as WisdomTree and Invesco, are newer providers with a shorter track record.
- Fund size. The third factor to consider is the fund’s size. When picking an ETF, it’s a good rule to go with the bigger is better mentality. A robust ETF will have a fund size of €1,000m or more.
- Total Expense Ratio (TER). The fourth factor to consider is the ETF’s Total Expense Ratio (TER). The TER measures how much it costs to own and operate an ETF. Generally, the lower the TER, the better.
- Tracking difference. The tracking difference is the amount by which the ETF’s returns deviate from those of its underlying index or sector. A small tracking difference is generally a good sign, as it means that the ETF is closely following its benchmark.
- Tax domicile. Many European ETF providers have chosen to domicile their funds in Ireland or Luxembourg. These two jurisdictions have favorable tax withholding agreements with the U.S. and individual European countries. Ireland, for example, does, for the most part, not withhold dividend taxes when paying dividends to individuals in other EU countries.
- Sustainability. For many investors, sustainability is an important consideration when picking an ETF. Several sustainable ETFs track indices or sectors that consider environmental, social, and governance (ESG) factors. However, some have criticized the ESG criteria as too broad and not always indicative of true sustainability.
These are among the most important factors to consider when picking an ETF. However, there are many other aspects that investors can and should consider before making a decision.
How to buy ETFs in Europe
There are many ways to buy ETFs in Europe. The best way to buy ETFs will depend on the individual investor’s circumstances and preferences. That being said, ETFs are a standard investment product on most European online brokerages, so it’s generally easy to buy ETFs online. The important things to keep in mind are the broker’s fees, the type of account needed to trade ETFs, and whether the broker offers the specific ETFs that the investor is interested in.
1. Open a brokerage account
If you’ve decided to buy ETFs, you will need to open a brokerage account. Fortunately, this is fairly easy to do. Most European brokerages offer online accounts that can be opened in just a few minutes. After opening an account, you will need to fund it with money that can be used to buy ETFs.
2. Find your ETF
Once you have a brokerage account, you will need to find the ETFs that you want to buy. This can be done by searching the broker’s website or using a third-party financial research website. When looking for an ETF, it’s essential to consider things like the expense ratio, the tracking error, and the dividend yield.
ETFs offered to non-professional investors living in the EU must comply with UCITS directives, a set of regulations that govern how ETFs can be marketed and sold. When searching for ETFs, like those tracking the S&P 500 or the MSCI, you’ll notice the UCITS label. Vanguard FTSE ALL-World UCITS ETF and iShares MSCI ACWI UCITS ETF are two examples of ETFs that track global indexes and are available to non-professional investors in the EU.
3. Consider your time horizon
When buying ETFs, it’s important to consider your time horizon. This is the length of time that you plan on holding the ETF. For example, if you’re saving for retirement, you may have a time horizon of 20 or 30 years.
In general, the longer your time horizon, the more aggressive you can be with your investment. This is because you have more time to ride out any bumps in the market. Conversely, if you have a shorter time horizon, it’s best to invest in less risky ETFs or not invest at all. What happens if you need money from the funds during a downturn in the market? Are you willing to sell at a loss? Or do you have other investments or cash to cover any short-term needs?
4. Buy the ETF
Once you have found the ETFs you want to buy, the next step is to buy them. This can be done by placing an order on the broker’s website. When buying ETFs, you need to specify the number of shares or units you want to purchase. It’s also important to consider the bid-ask spread and the commissions when buying ETFs
5. Hold the ETF
This sounds obvious, but once you’ve bought the ETF, you need to hold it until you’re ready to sell. This may be years down the road, depending on your investment goals. During this time, you might be tempted to check the ETF price on a daily basis. However, it’s best not to obsess over the market movements and just let the investment ride.
ETFs vs. stocks
When considering whether to buy ETFs or stocks, there are a few things to consider.
First, ETFs offer diversification, which can be helpful for investors who don’t want to invest in individual stocks. Diversification is the practice of investing in a variety of assets to reduce risk. When you buy an ETF, you’re buying a basket of stocks, which reduces your risk relative to buying a single stock. To diversify via individual stocks, you would need to purchase shares in multiple companies.
Second, ETFs don’t produce alpha. Alpha is a measure of an investment’s performance relative to the market. A stock with alpha outperforms the market, while a stock with negative alpha underperforms the market. ETFs do not produce alpha because they track an index or sector rather than trying to beat it. As Jack Bogle famously said, “Don’t look for the needle in the haystack. Just buy the haystack.”
Third, there may be different tax implications for buying ETFs or stocks depending on the investor’s country of residence. Dividend distributions from ETFs may be subject to an additional tax rate than distributions from stocks or the gains on the sale of stocks.
So, when deciding whether to buy ETFs or stocks, it comes down to your investment goals. ETFs may be a good choice if you’re looking for diversification and don’t mind sacrificing the potential for outperformance. However, if you’re willing to take on more risk in exchange for the chance of alpha, then buying individual stocks may be the better option.
What is the best ETF broker in Europe?
There are plenty of great options when it comes to choosing an ETF broker in Europe. However, the best one for you will ultimately depend on your individual needs and preferences. With that said, some of the best brokers include Interactive Brokers, Saxo Bank, and DEGIRO.
Can you trade ETFs in Europe?
Yes, ETFs can be bought and sold in Europe. In fact, all the European brokers mentioned above offer ETF trading. Most European ETFs are domiciled in Ireland and can be traded on European exchanges like the London Stock Exchange (LSE) and Deutsche Börse. ETFs must comply with the UCITS directive, making them eligible for sale across the EU.
What ETFs can you buy in Europe
There’s no shortage of ETFs to choose from when investing in Europe. In fact, there are over 2000 ETFs listed on European exchanges. The most popular sectors for ETF investment include equities, fixed income, and commodities. However, investors can also find ETFs that invest in various other asset classes, including real estate, cryptocurrencies, and sectors like tech and pharma.
Why can’t Europeans buy U.S.-domiciled ETFs?
Investors living in the European Union don’t have access to U.S.-domiciled ETFs due to PRIIPs regulation. The PRIIPs regulation, which came into effect in January 2018, is a set of rules aimed at protecting retail investors from what the EU believes are complex and risky financial products. One of the regulatory requirements is that investment products must be packaged in a Key Information Document (KID), which must be provided to investors before they purchase the product.
EU-residents still have access to ETFs tracking American stocks as long as these funds are domiciled in the EU. So, instead of the U.S.-domiciled Vanguard SP500 (VOO), European investors can buy iShares SP500 UCITS (CSPX) or Vanguard SP500 UCITS (VUSD).
There are methods to get around the PRIIPs rules. Either by using a broker who isn’t abiding by PRIIPs regulations, investing via options or futures, by having professional-investor status, or investing through a legal entity such as a limited company. However, these solutions are complex and beyond the scope for most regular investors.
Are ETFs suitable for long-term investors?
There are no guarantees when it comes to investing. The financial markets can be volatile and risky, and there is no promise that any investment will provide attractive returns. However, ETFs can often be a good option for long-term investors because they offer easy diversification and the potential for average returns over more extended periods.
Are ETFs safer than stocks?
Again, there is no guarantee when it comes to investing, and no one investment is inherently safer than another. However, ETFs are often a lower-risk option than investing in individual stocks. This is because they offer diversification across many different holdings, which reduces the risk of losing money if any one stock performs poorly. On the other hand, ETFs rarely provide the same high returns as individual stocks.
What is an index?
An index is a type of financial market indicator that measures the performance of a particular section of the stock market. There are many different types of indexes, including those that track the performance of entire markets (such as the S&P 500 Index), sectors, or specific groups of stocks.
Sector ETFs vs market ETFs
There are two main types of ETFs: sector ETFs and market ETFs. Sector ETFs track specific sectors of the economy, such as healthcare or tech. Market ETFs, on the other hand, track a broader index of the stock market, such as the S&P 500 Index. Both types have their own advantages and disadvantages, so it’s essential to understand the difference before investing.
ETFs are a popular way to invest in the stock market. They offer diversification, potential returns, and lower risk than individual stocks. And they do it all for what often amounts to a very reasonable cost. When deciding whether to buy ETFs or stocks, it comes down to your investment goals.
ETFs may be a good choice if you’re looking for diversification and don’t mind sacrificing the potential for outperformance. However, if you’re willing to take on more risk in exchange for the chance of higher returns, then buying individual stocks may be the better option.
The best ETF brokers in Europe offer a variety of features that can be important for long-term investors. These include low fees, a wide selection of ETFs, and the ability to trade on multiple exchanges. When choosing an ETF broker, it’s important to consider your individual needs and preferences to find the best one for you.