EU investing

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Euflag.jpg This page deals specifically with investing in the European Union

EU investing shows how you can apply the Bogleheads investment philosophy if you live in the European Union (EU). You must be aware of a few things described below

US domiciled funds distribute their income periodically, and you must pay withholding tax to the US government. There may be other tax-related problems with US domiciled funds, depending on your country of residence. In short, US domiciled funds aren't designed for investors from the EU.

There aren’t enough low-cost index funds available in the EU, but there are a lot of exchange-traded funds (ETFs) available. You can find all the ETFs available in the EU at (enter keywords into the search field, such as "REIT", "emerging markets", "MSCI ACWI" etc. 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. For example, UK citizens should investigate whether the chosen ETF has "UK Reporting Status" or not, French citizens should look for "Plan d'Epargne en Actions" (PEA) eligibility etc.

This page is not intended for US (tax) resident investors, as their situation is very specific.

Example of EU domiciled ETF providers

Fig.1.Brussels Euronext Exchange
EU Domiciled Providers
Provider Website
Amundi ETF link
BlackRock iShares link
Deutsche Bank db X-trackers link
HSBC ETFs link
Lyxor ETF link
SPDR ETFs Europe link
Vanguard UK link

Accumulating/capitalizing vs. distributing ETF share classes

The biggest difference between US domiciled ETFs and EU domiciled ETFs is that EU domiciled ETFs can reinvest the received dividends/interests, without distributing them. Let's say 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.

Many countries in Europe do not tax dividends if they are reinvested by the fund itself. In those countries, buy only capitalizing/accumulating ETF shares, but consult your tax advisor before doing so. [note 1]

The problem with distributing ETFs is that you may have to pay dividend tax in your home country, then when you reinvest the dividends you must pay brokerage commissions, and also the bid/ask spread. These problems often do not exist in capitalizing/accumulating ETFs.

The KIID of the ETFs will tell you whether the ETF is accumulating or distributing.

Base currency vs. trading currency vs. currency of the underlying asset

The same ETF can have different share classes, and can be listed on several different stock exchanges. For example, the SPDR® MSCI ACWI IMI ETF is listed on 5 different stock exchanges, and in different currencies. Where should you buy it, and in which currency?

This ETF tracks the MSCI All-Country World Investable Market Index, which is a truly global index. The base currency of the fund is USD. This means that the ETF shares are in the USD currency, and the tracked index is also quoted in USD, so it is best to buy the ETF shares in USD.

However you can also buy the ETF shares in the EUR, GBP or CHF [1] currencies, on different stock exchanges. This is useful if your money is in EUR, GBP or in CHF, and not in USD, and you don't want to exchange your money for USD. For example, if your income is in EUR, and all or most of your expenses are in EUR, it makes sense to also invest in EUR, and don't buy USD just for the sake of the investment.

Of course, if the base currency of the ETF is USD, but you buy it in EUR, then you won't get the same level of return (in EUR) as compared to the return in USD, if you bought the ETF share in USD. Because your level of return, expressed in the trading currency of the fund, will vary according to the exchange rate between the EUR and the USD. For Example: take the db x-trackers II Barclays Global Aggregate Bond UCITS ETF 1C as an example: compare the graphs of performance in USD and performance in EUR 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.

It is important to understand that the real currency risk is linked to the currency of the underlying assets. For example: Assume a fund that invest in Japanese Assets that trade in JPN. Assume the base currency of the fund is USD and the trading currency is GBP. Assume a EUROpean buys the fund (by exchanging his Euro's to British pound and then buy the fund). The currency risk for the above is related to the evolution of the exchange rate JPN-EUR. The evolution of the exchange rates of GBP (trading currency) and USD (base currency) are immaterial to the currency risk that the investor from EUROpe runs.

Dividend taxation

Investors that hold funds that hold securities are taxed at multiple levels on dividends. Depending on the situation of the individual investor one can optimize the taxation.


  • L1TW: Percentage of tax withholding by the home country of the security on the dividends distributed by the underlying international securities (Level I).
  • L2TW: Percentage of tax withholding by the country where the fund is domiciled on the dividends distributed by the fund (Level II).
  • L3T: Percentage of taxation that the individual investor needs to pay in his home country.

Aspects influencing the taxation

  • for L1TW:
    • The L1TW taxes paid by the fund depend on the tax-treaties between the country of the asset and the country of hte fund.
    • The L1TW taxes paid by the fund can be estimated using each fund's annual report, by dividing "Non-reclaimable withholding tax" by "Dividend Income".
  • for L2TW:
    • If you are a non-treaty NRA investing in US-domiciled investments, that number is 30%, in a treaty country this is often 15% (or 10%)
    • 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.
    • If your fund does not distribute the dividend, but reinvest them immediate, no L2TW taxes are withheld.
  • for L3T:
    • This 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, the reporting of these reinvested-dividends poses a real challenge. In these countries it might be easier not to acquire accumulating funds.
    • Sometimes countries allow to recuperate the L2TW and L1TW taxes, also based on the respective tax-treaties.

Net total return vs. gross total return index

It is important to know that 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) MSCI Index Definitions:

The MSCI Total Return Indices measure the price performance of markets with the income from constituent dividend payments. The MSCI Daily Total Return (DTR) Methodology reinvests an index constituent’s dividends at the close of trading on the day the security is quoted ex-dividend (the ex-date).

Two variants of MSCI Total Return Indices are calculated:

  • With Gross Dividends: Gross total return indices reinvest as much as possible of a company’s dividend distributions. The reinvested amount is equal to the total dividend amount distributed to persons residing in the country of the dividend-paying company. Gross total return indices do not, however, include any tax credits.
  • With Net Dividends: Net total return indices reinvest dividends after the deduction of withholding taxes, using (for international indices) a tax rate applicable to non-resident institutional investors who do not benefit from double taxation treaties.

This means you can only earn the return of the net total return indicies, 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. Please note that you as an ETF shareholder will only gain a portion of the securities lending income, the rest will go to the ETF provider. The exact ratio may vary by ETF provider. For example, the ETF provider could say that you as a shareholder will receive 50% of the securities lending income, and the remaining 50% will go to the fund provider.

Index tracking strategies

The index fund structure determines the strategy to track the index.

Full physical replication: the ETF buys and manages all the underlying constituent securities of that index – ie the ETF aims to hold every security the index at the appropriate weighting.

Some providers that aim for full replication but have minor differences in the statistical weightings of individual assets between the ETF’s basket and the index describe their replication methodology as sampling.

Physical replication with optimization: optimization involves only holding some of the underlying constituents of the index being tracked. Optimization methods are entirely model-driven, with a computer system making the buy and sell decisions. The ETF manager may use the physical replication with optimization if the index being tracked contains too many securities, and the ETF manager would like to reduce transaction costs.

Swap-based replication: Synthetic ETFs allow replication of the index using derivatives as opposed to owning the physical assets.

The most transparent and simplest to understand form of index tracking is the full physical replication.


  1. Accumulated dividends are taxed in, for instance, Germany and Switzerland.

See also


  1. EUR= EURO
    GBP=British Pound
    CHF=Swiss Franc

Further reading

External links