Index funds and ETFs outside of the US

An index fund is a fund that pools investors' capital for the purpose of investing in securities, typically a mutual fund or exchange-traded fund (ETF), and which aims to replicate the movements of an index of a specific financial market.

Index funds and ETFs were first created in the US and are now widely available outside of the US. A fund's domicile can affect its tax and other characteristics.  is an introduction to global aspects of index funds and ETFs, the differences between the domiciles, and the decisions you need to take to build a portfolio.

Index fund
A well-managed index fund provides you with a simple way to access advantages such as low costs, improved tax efficiency, style consistency and lower manager risk. Remember though that not all index funds are low cost, and that active investors can exploit some indexes.

Exchange-traded fund
An exchange-traded fund, or ETF, is a registered investment company. An ETF is a fund that holds a collection of assets and is traded on a market, so that investors can buy from or sell to each other on a stock exchange. ETFs have a creation and redemption procedure that generally makes the difference between price and Net asset value (NAV) very small.

ETFs outside of the US are often traded on more than one exchange, and in more then one trading currency (see below).

Index fund or ETF
Outside of the US, although some countries offer their residents some low-cost index mutual funds, there are many index exchange-traded funds (ETFs) available to everyone. You can find all the ETFs available in the EU at etfinfo (enter keywords into the search field, such as "REIT", "emerging markets", or "MSCI ACWI", or use the advanced search function). These ETFs are usually domiciled in Ireland or Luxembourg.

You should consult with your tax advisor before investing in ETFs. You must carefully read the Key Investor Information Document (KIID) and the prospectus of each ETF you choose. Look for important tax-related information in these documents.

Domicile of the fund and consequences
Just like a person, a fund or ETF has a domicile. This is the country in which the fund's holding company is legally incorporated, and typically where the administration and management of the fund itself takes place.

Despite investing in identical underlying assets, investors in varying personal 'tax circumstances' will get different results depending on the domicile of the fund they choose to hold. Sometimes wildly different.

European UCITS index funds
Undertakings Collective Investment in Transferable Securities (UCITS) is a European Commission regulatory framework. It creates a harmonised regime throughout Europe for the management and sale of mutual funds, including ETFs. UCITS funds registered in Europe can be sold to investors worldwide using unified regulatory and investor protection requirements.

There are specific legal requirements where a UCITS fund intends to use a financial index for investment or efficient portfolio management purposes. The index should be:
 * Sufficiently diversified;
 * Represent an adequate benchmark for the market to which it refers;
 * Be published in an appropriate manner;
 * Be independently managed from the management of the UCITS.

MiFID and PRIIPs regulations
The Markets in Financial Instruments Directive II (MiFID II) and the Packaged Retail and Insurance-based Investment Products (PRIIPs) Regulation rules require EU-based firms to disclose specific information on the costs and charges of certain investment products or services. See Tutorial: PRIIPs and MiFID II: The similarities and differences - FTAdviser.com

US domiciled index funds
Non-US investors may be subject to both US dividend withholding taxes and US estate taxes, on top of any taxation by their country of residence.

Guidance and decision tables for non-US investors
You need to choose appropriate investment funds. The list below offers guidance. Read these wiki pages first, as they explain how to make the right decisions:
 * Nonresident alien investors and Ireland domiciled ETFs: This page discusses why it is better for a nonresident alien with poor or no US tax treaty to invest in Ireland domiciled exchange-traded funds (ETFs) as opposed to the popular US domiciled mutual funds discussed by and used by US-based investors.
 * Non-US investor's guide to navigating US tax traps: US tax laws contain multiple traps for unwary non-US investors. This page contains a guide for non-US investors planning to use index tracker funds or ETFs, with the aim of helping these investors to avoid falling into US tax traps by navigating around, through, or between them.
 * Nonresident alien's ETF domicile decision table: When selecting an index tracking fund, US nonresident alien investors have a broad choice between US domiciled ETFs and non-US domiciled ETFs. This page summarises the recommended ETF domicile that US nonresident aliens might use, based on their own country of residence and domicile. The goal is for investors to obtain the best tax result.

Accumulating (or capitalizing) and distributing ETF share classes
One of the biggest differences between US domiciled ETFs and EU domiciled ETFs is that EU domiciled ETFs can reinvest the received dividends or interest, without distributing them. Suppose that an ETF holds a number of stocks. The ETF keeps receiving dividends from these stocks periodically. In the US, a fund must distribute these dividends to the investors. In the EU, the ETF can either distribute the dividends, or immediately reinvest back into the ETF, buying more stocks.

There are a few things to consider with distributing ETFs. The country of the fund might withhold dividend taxes, you may have to pay dividend tax in your own home country, and then when you reinvest the dividends you must also pay both brokerage commissions and the bid/ask spread. By using capitalizing (accumulating) ETFs you might be able to avoid some of these.

Some countries in Europe do not tax dividends if they are reinvested by the fund itself. If you live in one of those countries, you may find it useful to buy only capitalizing (accumulating) ETF shares, but consult your tax adviser before doing so. In other countries there is no benefit to this type of share.

An ETF's Key Investor Information Document (KIID, or sometimes just KID) tells you whether it is accumulating or distributing.

Base currency, trading currency, and currency of the underlying assets
The same ETF can have different share classes, and can be listed on several different stock exchanges in different currencies. Look for the ISIN code as unique identifier together with the name. Funds with different trading currency will have the same ISIN, but a different ticker if traded on the same exchange. If the fund trades on different exchanges then it may or may not have the same ticker.

For example, the SPDR® MSCI ACWI IMI ETF is listed on five different stock exchanges, in different currencies, and tracks the MSCI All-Country World Investable Market Index, which is a truly global index.

Where should you buy it, and in which currency?

The base currency of the fund is USD. This means that the ETF shares are managed in the USD currency, and the tracked index is also quoted in USD. You can also buy the ETF shares in the USD, EUR, GBP or CHF currencies, on different stock exchanges. This is useful if your money is in EUR, GBP or in CHF, and not in USD, and you do not want to exchange your money for USD.

Currency risk
It is important to understand that your real currency risk is linked to the currency of the underlying assets. For example, consider a fund that invests in Japanese Assets that trade in JPY. Suppose that the base currency of the fund is USD and its trading currency is GBP, and that a European investor exchanges their Euros to British pounds sterling and then buys the fund. The currency risk for this investor arises from the change of the JPY to EUR exchange rate. Any changes in the exchange rates of GBP (trading currency) and USD (base currency) are immaterial to the currency risk that this investor faces.

Of course, if you bought in EUR, you won't get the same level of return (in EUR) as compared to the return in USD. For example, take the db x-trackers II Barclays Global Aggregate Bond UCITS ETF 1C. Comparing the graphs of performance in USD and performance in EUR shows that the graphs are different but actually the fund (and the assets) are the same. The difference that you see in the graphs is only a representation of the change of the exchange rate over the last months.

Currency hedging
Foreign securities such as stocks and bonds expose you to currency fluctuations, which may reduce, or add to, yearly returns. Currency hedging, also known as foreign exchange hedging, is the practice of removing the effects of currency fluctuations from the returns obtained by a holding that is valued in a different currency.

In the case of foreign equities held over several decades, the dominant opinion on the Forum is not to hedge the currency exposure because:
 * equity volatility is much larger then currency volatility;
 * over several decades, the currency fluctuations should even out;
 * hedging adds to costs and is not precise;
 * and for purchasing power parity (PPP).

In contrast, you should nearly always hedge bonds as far as is feasible, as unhedged global bonds have 2.5 times the volatility of hedged global bonds or local bonds.

Net total return and gross total return index
ETFs almost always track the net total return version of an index. From the MSCI website (MSCI is one of the most popular index providers) at MSCI Index Definitions:

This means you can only earn the return of the net total return indices, which is the gross total return less dividend withholding tax.

Securities lending
Securities lending is a common practice for institutional investors as well as commingled funds, mutual funds and exchange traded funds (ETFs), and these practices are strictly regulated in most financial markets.

In a securities lending transaction, securities are temporarily transferred by one party (the lender) to another (the borrower). Securities lending may directly benefit shareholders, as it generates revenue for the fund which can offset fund expenses and improve index tracking. As an ETF shareholder, you will only gain a portion of the securities lending income, with the rest going to the ETF provider. The exact ratio varies by ETF provider. For example, the ETF provider could say that you as a shareholder will receive 34% of the securities lending income, and the remaining 66% will go to the fund provider.

Index tracking strategies: replication or synthetic
An index fund manager tries to capture market returns using a number of management techniques. These include replicating or sampling the index universe of securities, equitizing cash balances to remain 100 percent invested, and trading strategies to minimize transaction costs.


 * Full physical replication: Index funds tracking large size and mid size companies usually buy and hold all of the stocks of the index.
 * Physical replication with optimization or Sampling: For indexes which comprise illiquid securities, funds will sample their universe of securities to avoid high costs. Sampling tries to match the size and valuation metrics of the index.
 * Swap-based replication or synthetic ETFs: Certain funds effectively replicate the index using derivatives, as opposed to owning the physical assets.
 * Equitization: The index manager reduces the tracking error of holding cash balances by buying a futures contract with the cash holdings to avoid the cash drag.

Researching and comparing ETFs
The following web sites are ETF screeners focused on non-US domiciled ETFs:
 * justETF.com ETF Screener
 * Morningstar.co.uk ETF Screener - and all other local Morningstar sites.

Some of the country pages in the Non-US domiciles in this wiki category contain sample portfolios or suggestions for ETFs or funds. Although you can use these to draft a first portfolio, it is a good idea to post a question on the forum, as every country is different, and the recommendation might change over time.

Non-US ETF exchanges and trading volume
Many ETFs trade on their home country exchanges. For example, Australian domiciled ETFs are quoted on the Australian Stock Exchange, and Canadian domiciled ones on the Toronto Stock Exchange.

European stock exchanges
Europe has several stock exchanges, and a single UCITS ETF is often quoted on more than one, with the choice often determined by the trading currency. The ticker might or might not be the same in these cases. It will however usually be similar. You can verify whether two ETFs traded on different exchanges are in fact the same fund by comparing their ISIN codes.

London Stock Exchange (LSE)
You can use the London Stock Exchanges web site to check for an ETF's trading volume over the past 12-months or 30-days. Details are on the London Stock Exchange ETF Prices &amp; Markets page. After you find the ETF of interest, navigate to its "Prices and trades" page to get the graphs and trading data.

The UK charges stamp duty of 0.5% on purchases of UK stocks. However, this tax does not apply to ETFs traded on the London Stock Exchange. ETFs are free of stamp duty when traded on secondary markets.

Swiss Exchange (SIX/EBS)
You can obtain an ETF's past daily trading volumes using the "Product Search" feature at the SIX Swiss Exchange website to search for a security's ticker/ISIN, then navigating to "Market Data" and clicking on "Historical values".

Ongoing Charges Figure (OCF) and Total Expense Ration (TER)
In the context of UCITS, the Ongoing Charge Figure (OCF) is the estimated annual cost of owning an ETF. These are the charges that you will see quoted on a product’s website or in the Key Investor Information Document (KIID)/KID. The Total Expense Ratio (TER) is calculated at least once a year on an ex post basis. Some costs that are not included in the OCF are included in the TER. Performance-related fee is one of them.

Included in the published ongoing charges in the KID/KIID
The published ongoing charges in the KID/KIID includes all of the following:
 * All payments to persons managing the fund, including the costs related to the depository, the custodian(s) and any investment adviser;
 * All payments to any person providing outsourced services;
 * Registration fees, regulatory fees and similar charges;
 * Audit fees;
 * Payments to legal and professional advisers;
 * Any costs of distribution.

Included in the price of the fund
The price of the fund includes: This last point includes the cost of hedging.
 * A performance-related fee payable to the management company or any investment adviser;
 * Interest on borrowing;
 * Transaction cost related to the assets of the funds, including bid/ask spread on the assets of the fund;
 * Taxes paid by the fund;
 * Gains from security lending;
 * Swap fees in case of synthetic replication;
 * Payments incurred for the holding of financial derivative instruments (for example, margin calls).

Not included in the published price of the fund
The published price of a fund does not include:
 * Entry or exit charges or commissions, or any other amount paid directly by the investor;
 * Taxes paid by the investor;
 * Dealing fees;
 * Transaction cost related to funds itself, including bid/ask spread on fund;

Total expense ratio
The Total Expense Ratio (TER) of a simplified prospectus scheme is the ratio of the scheme's total operating costs to the average net assets of the fund; including all costs that are specific to the fund and impact the price, excluding the costs specific to the investor.

The TER is calculated at least once a year on an ex post basis, generally with reference to the fiscal year of the simplified prospectus scheme. For specific purposes it may also be calculated for other time periods. The simplified prospectus should in any case include a clear reference to an information source (for example, the scheme's website) where the investor may obtain TER figures for prior years or other periods. Performance fees are included in the TER and should also be disclosed separately as a percentage of the average net asset value. This is a main difference between TER and OCF.

Other costs
Outside of the OCF and TER costs, if you invest in index funds of ETFs you face the following additional costs:
 * Transaction costs,
 * Platform charges and dealing fees,
 * Bid-offer spread you pay when you trade the ETF.

Certain funds hedge currencies. The costs related to this are also not included in the OCF or TER.

In addition you are liable to any local tax on your investments.

Taxation related to non-US index funds
Every country has its own tax legislation. Tax treaties affect cross-border taxation between the countries. Depending on your situation, you may be able to optimise your taxation. Most countries allow a claim of local tax credits for taxes paid in other countries. This may or may not be based on any applicable tax treaties.

You can face many different types of taxes on your index funds, for example:
 * Tax on dividends received,
 * Tax on dividends accumulated inside a fund (and not received),
 * Tax on interest received,
 * Capital gains tax,
 * Transaction taxes (sometimes referred to as Tobin taxes),

You may also be subject to more than one overlapping tax regime. For example national taxes, local or regional taxes, city taxes, and foreign taxes levied by the country of source of income might all apply at the same time. You need to find an efficient way through this maze of taxes. This is often not straightforward.

Levels of taxation
If you hold funds you may face multiple levels of tax:
 * Level 1: Taxation by the home country of the security.
 * The Level 1 taxes depend on the tax-treaties, if any, between the country of the asset and the country of the fund as well as the tax legislation in the country of the asset.
 * Level 2: Taxation by the country where the fund is domiciled.
 * The Level 2 taxes paid by the fund depend on the tax-treaties, if any, between the country of the fund and the country of the investor, and the tax laws in each country.
 * Level 3: Taxation by your home country.
 * The Level 3 taxes paid by the investor depend on the local tax laws in their country.
 * Sometimes countries allow investors to claim local tax credits for Level 2 and Level 1 taxes, also based on the respective tax-treaties.

Dividend taxation
Investors that hold funds that hold securities can be taxed on dividends by multiple countries at multiple levels.

Calculating dividend taxation as a ratio
There are 3 levels of dividend taxation to apply.


 * L1TW: Percentage of tax withholding by a security's home country on dividends distributed by that security to the fund (Level 1).
 * L2TW: Percentage of tax withholding by the country where the fund is domiciled on the dividends distributed to the investor by the fund (Level 2).
 * L3T: Percentage of taxation that the individual investor needs to pay in their home country (Level 3).

The taxation to be withheld for Levels 1 and 2 can be calculated as a ratio:


 * Tax Withholding Ratio = (YIELD &times; L1TW) + ((YIELD &times; (1 - L1TW) - TER) &times; L2TW)

The first term in parentheses calculates the Level 1 leakage. The second term uses the remaining dividend, deducts the fund's TER, then applies the individual's Level 2 tax to the remaining sum.

The main article contains detailed example calculations for both US and Ireland domiciled funds.

Aspects influencing the dividend taxation

 * For L1TW: taxation by the country of the asset:
 * You can estimate the L1TW dividend taxes paid by the fund using each fund's annual report, by dividing "Non-reclaimable withholding tax" by "Dividend Income".
 * For L2TW: taxation by the country of the fund:
 * If you are a US nonresident alien and invest in US domiciled funds or ETFs, and your country does not have a tax treaty with the US, there is a US dividend withholding tax of 30%. This reduces to 15% for residents of most treaty countries, and 10% for a few countries.
 * If you are investing in Ireland domiciled ETFs and you do not reside in Ireland, you do not have to pay any Irish tax withholding at the fund level.
 * In most countries, if your fund does not distribute the dividends but reinvests them immediately, no L2TW taxes are withheld.
 * For L3T: taxation by the country of the investor:
 * This dividend taxation can be a withholding tax, where the broker withholds the tax before paying the investor, or it can be a taxation in the yearly tax return based on the dividends declared.
 * Many countries will not have a L3T if there are no dividends paid to the investor.
 * Some countries will still tax the reinvested dividends. Reporting these reinvested dividends for tax can pose a real challenge. In these countries it can be easier not to use accumulating funds outside of tax-sheltered accounts.

Capital gains taxation

 * For Level 1:
 * Capital gains taxation on Level 1 depends on local tax legislation and tax treaties. There is often no Level 1 capital gains taxation for gains realised inside funds.
 * For Level 2:
 * US domiciled funds can distribute capital gains. This is not taxed by the US when paid to non-US investors.
 * Ireland domiciled ETFs are generally not required to make capital gains distributions. Capital gains accrued within the ETF accumulate, and are realised only when the investor sells ETF shares. These are not taxed by Ireland for non-Irish investors.
 * For Level 3:
 * Capital gains taxation on Level 3 depends on the local tax laws of the country of the investor.