Index funds and ETFs outside of the US

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Ambox globe content.svg This article contains details specific to non-US investors. It does not apply to United States (US) investors, or to US citizens and US permanent residents (green card holders) living outside 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.[note 1]

Index funds and ETFs were first created in the US and are now widely available outside of the US. Depending on the domicile of the fund it is subject to local legislation leading to local differences. Index funds and ETFs outside of the US is an introduction to global aspects of index funds and ETFs, the differences between the domiciles, and the decisions a non-US investor needs to take to build their portfolio.

Index fund

A well-managed index fund provides investors with a simple way to access such advantages as low costs, improved tax efficiency, style consistency and reduced manager risk. Investors should be mindful that not all index funds are low cost and that some indexes can be exploited by active investors.

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 the market, so that investors buy from or sell to another shareholder on the stock exchange. ETFs have a creation/redemption procedure that generally makes the difference between price and 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, there are few low-cost index mutual funds available, but there are a lot of index exchange-traded funds (ETFs) available. 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 the regulatory framework of the European Commission that creates a harmonised regime throughout Europe for the management and sale of mutual funds including ETFs. UCITS funds can be registered in Europe and sold to investors worldwide using unified regulatory and investor protection requirements.[1]

Specific legal requirements apply where a UCITS fund intends to use a financial index for investment or efficient portfolio management purposes. The necessary criteria are that 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.[2]

MiFID and PRIIPs regulations

The Markets in Financial Instruments Directive II (MiFID II)[3] and the Packaged Retail and Insurance-based Investment Products (PRIIPs) Regulation[4] rules introduce requirements for 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 -

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

Investors need to make choices in the selection of investment fund. The list below offers guidance. It is advisable to read this wiki page first, as it explains the fundamentals needed to take the necessary 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 difference 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. In those countries, it may be 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.[note 2]

The Key Investor Information Document (KIID, or sometimes just KID) of an ETF will tell you whether it is accumulating or distributing.[5]

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 a different ticker if traded on the same exchange. If the fund is trading 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[note 3] 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 the 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

See also: Currency hedging on our Canadian finiki sister site.

Foreign securities such as stocks and bonds expose the domestic investor to currency fluctuations, which may reduce, or add to, yearly returns. Currency hedging, also known as foreign exchange hedging, refers to 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).[note 4]

In contrast, bonds should always be hedged, as unhedged global bonds have 2.5 times[citation needed] the volatility of hedged global bonds or local bonds.

Net total return and 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) at 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 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. 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 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 attempts to capture market returns by employing a number of management techniques. These include replicating or sampling the index universe of securities, equitizing cash balances to remain 100 percent invested, and by employing trading strategies that 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. The sampling attempts to match the size and valuation metrics of the index.
  • Swap-based replication or synthetic ETFs: Certain funds perform replication of 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:

Some of the country pages in the Non-US domiciles in this wiki category contain sample portfolios or suggestions for ETFs or funds. While these can be taken to draft a first portfolio it is good 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 are traded 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

Within Europe there are several stock exchanges. A single UCITS ETF may be quoted on multiple stock exchanges, with the choice often determined by the trading currency. Please note that 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 the past 12-months or 30-days. Details are on the London Stock Exchange ETF Prices & 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.[6]

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".

Cost and expenses related to UCITS index funds and ETFs

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.[7] 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 following are all included in the published ongoing charges in the KID/KIID:

  • 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.

Not included in the published ongoing charges in the KID/KIID

Included in the price of the fund

The following are included in the price of the fund:

  • 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;[note 5]
  • 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).

This last point includes the cost of hedging.

Not included in the published price of the fund

These are not included in the published price of the fund:

  • 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.[8][9]

Other costs

Outside of the OCF and TER costs an investor in index funds of ETFs has 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 an investor is also liable to taxation on their investments.

Taxation related to non-US index funds

Every country has its own tax legislation. Cross-border taxation is determined by tax-treaties between the countries. Depending on the situation of the individual investor one can optimise the taxation. Sometimes 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.

Investors may face many different types of taxes on their 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),

They 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. Investors need to find an efficient way through this maze of taxes. This is often not straightforward.

Levels of taxation

Investors that hold funds that hold securities are taxed at multiple levels.

  • 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 the home country of the investor.
    • 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 × L1TW) + ((YIELD × (1 - L1TW) - TER) × L2TW)

The first term in parentheses calculates the Level 1 leakage. The second term uses the remaining dividend, deducts the fund's TER,[note 6] 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:
    • The L1TW dividend 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: 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.[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 at the fund level.[11]
    • 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.


  1. This page primarily addresses traditional market capitalization indexing. Indexes have been developed based on alternate weighting methodologies. See Alternate Indexes for an examination of these indexes.
  2. For example, accumulated dividends are taxed annually in Germany, Switzerland and the UK.
  3. USD=US dollar
    GBP=British Pound
    CHF=Swiss Franc
  4. Purchasing Power Parity (PPP) is a theory that measures prices at different locations using a common basket of goods. While PPP can be used to measure between two places using the same currency (like countries inside the Eurozone), its most common usage is between two locations that use different currencies. In that case, PPP produces an exchange rate that equals the ratio of the price of the basket of goods at one location over the price of the basket of goods at a different location. The PPP exchange rate may be different than the market exchange rate because of transportation costs, tariffs, and other frictions. PPP exchange rates are widely used when comparing GDP from different countries.
  5. Additional transaction costs include payments to third parties to meet costs necessarily incurred in connection with the acquisition or disposal of any asset for the UCITS fund’s portfolio, whether those costs are explicit (for example, brokerage charges, taxes and linked charges) or implicit (for example, costs of dealing in fixed-interest securities, and market impact costs).
  6. Some countries allow funds to subtract the fund's TER before paying the dividends, but some do not. Please review the taxation of the country where the fund is domiciled.

See also


  1. "Investment funds: EU laws and initiatives relating to collective investment funds". European Commission. Retrieved September 20, 2019.
  2. "UCITS Financial Indices". Central Bank of Ireland. Retrieved September 20, 2019.
  3. "MiFID II". European Securities and Markets Authority. Retrieved September 20, 2019.
  4. "Key information documents for packaged retail and insurance-based investment products (PRIIPs)". European Commission. Retrieved September 20, 2019.
  5. "Key information documents for packaged retail and insurance-based investment products (PRIIPs)". European Commission. Retrieved March 19, 2019.
  6. "Exchange Traded Funds" (PDF). London Stock Exchange. Retrieved March 19, 2019.
  7. "Final KID Ongoing Charges Methodology" (PDF). European Securities and Markets Authority. May 11, 2015. Retrieved September 20, 2019.
  8. FCA Handbook (March 7, 2016). "Total expense ratio calculation". Financial Conduct Authority. Retrieved September 20, 2019.
  9. Petra Riedl (August 2015). "Cost of ETFs: Total Expense Ratio (TER) vs. Total Cost of Ownership (TCO)". JustETF. Retrieved September 20, 2019.
  10. "Tax Rates on Income Other Than Personal Service Income Under Chapter 3, Internal Revenue Code, and Income Tax Treaties (Rev. Feb 2019)" (PDF). IRS. Retrieved March 19, 2019.
  11. "WHY IRELAND FOR ETFs" (PDF). Irish Funds. Retrieved March 19, 2019.

External links