ETF Portfolio with European ETFs for 2024
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While Swiss investors can invest in US ETFs, some people are forced to use the inferior European ETFs. For instance, users of DEGIRO and several other brokers cannot use US ETFs. Therefore, they must know how to build a portfolio with European ETFs.
You can also use mutual funds. It is almost identical to an Exchange Traded Fund (ETF). However, an ETF is much more flexible to invest in Europe. The main problem is that European ETFs are inferior to U.S. ETFs in many ways, as we will see in detail. Unfortunately, we may not have the choice to use them. The alternative of not investing at all would be much worse!
In this article, we go through the multiple steps of designing a new portfolio. First, you must decide the allocation of the different parts of the portfolio. Then, you need to choose between different stock market indices. Finally, you need to select the best ETF for each index. I believe it is an excellent exercise. However, it is not trivial and should not be taken lightly.
European ETFs
European ETFs only have disadvantages compared to U.S. ETFs.
First, European ETFs often have higher fees. The TER of European funds is almost always higher than U.S. funds. It is quite sad. For instance, Vanguard Total World ETF (VT) in the U.S. has a TER of 0.09%. Their European equivalent Vanguard FTSE All-World ETF, has a TER of 0.25%. This TER is almost three times more expensive. In some cases, you will find European ETFs with reasonable fees. But this will not be possible most of the time.
Not only are their fees higher, but trading European ETFs is more costly than trading U.S. ETFs. With all the brokers I know, trading European ETFs is more expensive than trading U.S. ETFs. On Interactive Brokers, I can trade a U.S. ETF for less than 50 cents. But it cost me at least ten times more to trade a Swiss ETF. That is pretty terrible!
Another problem is that European ETFs are much smaller than their U.S. equivalent. A smaller fund means a larger bid/ask spread. It also means lower liquidity due to the lower trading volume. There is also a small risk that a fund that is too small gets closed. And finally, a fund that is too small cannot replicate the index as well as a bigger fund.
One big problem many people do not consider is the difference in dividend taxes for many European investors. I did not research all the European countries. But this is true for Swiss investors. You should check if the same applies to you in your country. If you invest in U.S. funds, 30% of the dividends will be taxed.
However, you can reclaim 15% of the taxes via a W-8BEN form. And some brokers, such as Interactive Brokers, will do that for you directly. And you can also account for the remaining 15% in your tax declaration. If you use Swiss funds, you will be taxed at 35% of the dividends. And there will not be a way to get it back! It is more important than the TER of the fund!
If you only have access to European ETFs, the best is to use funds based in Ireland. In that case, you can reclaim 15% of the dividends. But you cannot reclaim the 15% withheld by the U.S. taxes.
If you want more details, I have an entire article about U.S. ETFs.
An example of an ETF Portfolio
For reference, here is a simple ETF portfolio I used in the past:
- 20% Swiss Stocks: iShares Core SPI ETF (CHSPI): A TER of 0.10%.
- 10% U.S. Stocks: Vanguard S&P 500 ETF (VOO): A TER of 0.04%. This fund has about 103 billion CHF.
- 70% World Stocks: Vanguard Total World ETF (VT): A TER of 0.09%. This fund has about 12.71 billion CHF of Assets Under Management (AUM).
The average TER of this portfolio is 0.087%. It may not be perfect, but I like this portfolio.
If we did not have access to U.S. funds, we would need to find two new funds for the U.S. stocks and the World Stocks. For this exercise, we will keep the same portfolio. There is no need to choose different stock market indexes. However, for each index, we need to choose a fund that follows it.
S&P 500 ETF
We should start by replacing the S&P 500 ETF with a European ETF. There are quite a few options available to us (you can search on justETF, for instance). There are three options that I would consider for this ETF:
- Invesco S&P 500 UCITS ETF: A TER of 0.05% and AUM of 4.5B
- iShares Core S&P 500 UCITS ETF: A TER of 0.07% and AUM of 8B.
- Vanguard S&P 500 UCITS ETF: A TER of 0.07% and AUM of 22B.
Given these choices, I would take the Vanguard fund. On the one hand, it has a slightly higher TER than Invesco. But it is five times bigger. And I like Vanguard Philosophy.
European ETF Portfolio with Total World ETF
For the world ETF, there are two indices that we can consider: The MSCI World Index and the FTSE All-World Index. Here are some interesting European ETFs following these two indexes:
- HSBC MSCI World UCITS ETF: A TER of 0.15% and 1.6B of assets.
- Invesco MSCI World UCITS ETF: A TER of 0.19% and 711M of assets.
- Vanguard FTSE All-World UCITS ETF: A TER of 0.22% and AUM of 3.5B.
- iShares MSCI World UCITS ETF (Dist): A TER of 0.50% and 5B of assets.
Honestly, I do not like any of these options. The first two funds are too small, and the last two are too expensive. European options for World ETF are pretty weak. But that is the way it is. If I had to choose, I would take the HSBC fund. But to be honest, the Vanguard is also interesting, although a little expensive.
I try to only invest in distributing funds. It has several advantages when you are retiring. However, considering investing in accumulating funds, you can consider the iShares MSCI World UCITS ETF (Acc). It has a TER of 0.20% and a considerable AUM of 17B dollars. This iShares ETF is a good fund if you want to invest in accumulating funds. It is still more expensive than the HSBC fund. But it is much larger.
That would give an updated portfolio with 0.129% TER. The difference is not so bad, but it is still a significant increase of about 30% in fees. And the quality of the ETFs is quite inferior. And, of course, we would lose 15% of the U.S. dividends.
Breaking down the world ETF
Since the European ETFs for world indices are not great, we can try to replicate the performance of the World index by using several ETFs. Here is the composition of the Vanguard World ETF (VT):
- North America: 58.40%
- Europe: 18.60%
- Pacific: 13.30%
- Emerging Markets: 9.40%
- Middle East: 0.20%
- Other: 0.10%
We can safely ignore the last two regions and still have a good representation of the entire market. If I were to replicate the performance of the world ETF, I would use the following percentages:
- United States: 60%
- Europe: 15%
- Pacific: 15%
- Emerging Markets: 10%
But the World ETF is only 70% of my portfolio. If we take this into account, I think I would go with:
- Swiss Stocks: 20%
- U.S. Stocks: 50%
- Pacific Stocks: 10%
- Europe Stocks: 10%
- Emerging Markets Stocks: 10%
You could also go 5% of Emerging Markets or even nothing. But that would probably be too much optimization already.
Now that we have our new allocation, we must find European ETFs for these regions. We already have an ETF for the first two regions. We need one for the three remaining regions: the Pacific, Europe, and Emerging Markets.
Note that this is meant as an exercise. I do not recommend going with a complicated portfolio. Having fewer funds makes it simple to invest.
Pacific ETF
We can start with stocks from the Pacific region.
A few indices cover the Pacific. What is interesting is that Japan is out of these indices. Since the big collapse of the Japanese market around 1986, it has been excluded from many indices. I can live without the Japanese stock market in my portfolio. If you cannot, you can use a Japan index as well as a Pacific index. Therefore, we can go with the MSCI Pacific ex-Japan index.
There are a few European ETFs option for this index:
- iShares Core MSCI Pacific ex-Japan UCITS ETF (Acc): A TER of 0.20% and 1.6B of managed assets.
- UBS ETF (LU) MSCI Pacific (ex-Japan) UCITS ETF (USD) A-dis: A TER of 0.30% and 175 million CHF managed.
- HSBC MSCI Pacific ex Japan UCITS ETF USD: A TER of 0.40% and 36 million AUM.
Once again, the choice is not great. Usually, I would take a fund that distributes dividends instead of accumulating them. But here, I would not pay the premium. Moreover, the last two funds are too small. And the last one is too expensive. So, I would personally go with the iShares fund for my 10% Pacific stocks.
Europe ETF
Now, we need a European ETF for the European region.
Quite a few indices cover this region. The first index we can look at is the FTSE Developed Europe index. Another one is the MSCI Europe index. Both these indexes only cover large-cap and mid-cap companies. A very popular index is the STOXX Europe 600 (or Euro Stoxx 600). It is a bit special since it contains 200 large-cap companies, 200 mid-cap companies, and 200 small-cap companies. I think it is an interesting index as well.
There are other indexes, for instance, the MSCI EMU. But in my opinion, the indices mentioned before are the best representatives of European companies’ performance. Here are the best European ETFs we can find with these indexes:
- iShares Core MSCI Europe UCITS ETF: 5.1B of AUM and a TER of 0.12%.
- Vanguard FTSE Developed Europe UCITS ETF: 1.8B of AUM and a TER of 0.12%
- Xtrackers MSCI EMU Index UCITS ETF 1D: 2.4B of AUM and a TER of 0.12%.
- Amundi STOXX Europe 600 UCITS ETF: 435M of AUM and a TER of 0.18%.
- Invesco MSCI Europe UCITS ETF: 529M of assets and a TER of 0.19%
- Invesco STOXX Europe 600 UCITS ETF: 279M of assets and a TER of 0.19%.
Given these choices, I would go with the iShares Core ETF. It is large enough, and the TER is quite good. Moreover, I prefer the MSCI Europe index to the FTSE Developed Europe index. But again, these are personal reasons. You can choose another ETF or another index!
Emerging Markets ETF
The last ETF we must choose is an ETF for the Emerging Markets.
There are two leading indices for these markets: The MSCI Emerging Markets and the FTSE Emerging Markets. I do not have a preference for one or the other.
Here are the best European ETFs for these two indices:
- iShares MSCI Emerging Markets UCITS ETF (Dist): 2.3B CHF of AUM and a TER of 0.18%
- Amundi MSCI Emerging Markets UCITS ETF (Acc): 3.8B CHF of AUM and a TER of 0.20%.
- Xtrackers MSCI Emerging Markets UCITS ETF 1C (Acc): 1B of assets and a TER of 0.20%.
- UBS ETF (LU) MSCI Emerging Markets UCITS ETF (Dist): 1.3B and a TER of 0.23%.
- Vanguard FTSE Emerging Markets UCITS ETF (Dist): 1.8B CHF of AUM and a TER of 0.25%.
- HSBC MSCI Emerging Markets UCITS ETF USD: 2.5B CHF of assets and a TER of 0.40%.
In this case, I would go with the iShares MSCI Emerging Markets UCITS ETF. It is a distributing ETF with a large size and a low TER.
European ETF Portfolio with multiple ETFs
Finally, we are done! We have chosen a portfolio, chosen the stock market indices, and chosen the ETFs. Here is the final portfolio:
- Swiss Stocks: 20%: iShares Core SPI ETF (CHSPI): TER of 0.10%.
- U.S. Stocks: 50%: Vanguard S&P 500 UCITS ETF: TER of 0.07%.
- Pacific Stocks: 10%: iShares Core MSCI Pacific ex-Japan UCITS ETF (Acc): TER of 0.20%.
- Europe Stocks: 10%: iShares Core MSCI Europe UCITS ETF: TER of 0.12%.
- Emerging Markets Stocks: 10%: iShares Emerging Markets UCITS ETF (Dist): TER of 0.18%.
This portfolio gives us a global TER of 0.105% for the entire portfolio. This portfolio is only slightly better than the version with the world ETF. It only has 0.024% fewer fees. And instead of merely having three funds, you have five funds.
This portfolio is not better than the portfolio with the world ETF. But if you want to minimize fees, this is the way to go. And I believe that these funds are a bit better together than the HSBC world fund. But it is up to you to decide if you prefer lower fees or a simpler portfolio.
Conclusion
As you can see, it is not an easy thing to design an entire ETF portfolio from scratch. First, you must decide the allocation of the different regions or even investing instruments (bonds and stocks, for instance). Then, you need to find the stock market index for each asset you want to invest in. Finally, you will need to find the best ETF for each index.
And this exercise gets more complicated when you are limited to using European ETFs. As we saw before, these European ETFs are inferior to U.S. ETFs.
Ultimately, we end up with a portfolio with inferior funds with a 30% fee increase. And this is not counting the significantly higher trading fees. Finally, we will pay much more taxes on the dividends since we cannot reclaim the U.S. dividends anymore. Overall, we are probably looking at twice the fees of the original portfolio.
If you still have access to US ETFs, I am not recommending you use European ETFs. This article is meant for people that do not have access to US ETFs.
If we lose access to US ETFs, should we stop investing? No! Investing with European ETFs is much better than not investing at all. And it is not that bad. Even in Switzerland, some people prefer investing with European ETFs. It is not optimal, but it works!
What would your portfolio look like without U.S. funds? Would you do it differently?
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Hi there,
I am actually trying to build a very similar portfolio when I came across your post. I found the iShares Core MSCI World (acc), with a TER of 0.20% (rather than 0.50%). What would you think of that one? I know it’s accumulating but I don’t put a lot of weight on that.
Also debating what to add to that one. It misses EM (could add the iShares EM), and would potentially like to be able able to rebalance regions at will (e.g. adding the Vanguard USA, plus the iShares CH and Europe), but that sort of defeats the purpose of simplifying with 1 world ETF.
I would also love to read your opinion on ESG investing. iShares also offers an ESG version of the World ETF with the same TER, but it holds ~400 positions rather than ~1600.
Thank you! Your posts are really helpful
Hi Andres,
As long as you know the differences between accumulating and distributing, both funds are good.
If you want to to rebalance regions yourself, you should indeed not use a World ETF, but several region ETFs. Although, why would you do that? A home bias makes sense for local stability, but other than that, it’s a bet that a region will do better than others.
There is nothing wrong with that, you just need to know that it’s a bias :)
I have an article about sustainable investing, it should help you :)
Thanks for your response Mr. TPS, good points!
I’ve done a bit of digging through your posts and online. If I was unrestricted, I would go for just VT for its massive exposure and low TER. Would you recommend still going for it knowing that as of next year we cannot add funds anymore? The plan would be to add as much as possible this year and then hold.
Considering the European options, the closest is VWRL. I actually like it a lot, except that it excludes small caps (and that is much more expensive). I see an AUM of $9.3B on Vanguard’s site, which is quite respectable, and this number can only go up since European investors cannot invest in VT. Beyond VT, this would be my preferred option. I haven’t found any small caps all-world good ETF yet, do you know of a good alternative? Or is it worth it?
The last question, as an IB user, do you recommend investing in ETFs through AEB in EUR or through LSE in USD?
Given that we still do not know whether we will lose access to VT next year, I would still recommend investing in VT.
VWRL is indeed an excellent alternative. I am thinking of going with either VWRL or the HSBC World ETF if I lose access to VT.
As for small-caps, I do not believe this is such a significant issue. Given the size of these companies, they would have a tiny allocation anyway. But if you want, I think that WSML seem like a good fit, even though a little expensive.
I would personally invest through LSE in USD, but this would not make a huge difference since the only difference would be the trading currency.
Thank you again!
I am still hesitant about VT for potential future issues with the US, but as things stand today, I agree is the best option.
Hi, thank you for the highlighting all these aspects one should consider when making an investment decision.
In your post you mention the difference in dividend taxes which, as I understand, arises from where funds are domiciled. It seems to me that most European ETFs tracking world indexes are domiciled in Ireland – what dividend tax treatment would Swiss-based investors get if investing in those ETFs? Does one have to fill out a form to claim the tax back?
What about ETFs domiciled in Switzerland? Searching on justetf.com, I couldn’t find any ETFs domiciled in Switzerland that would track world or US indexes. There seem to be less than 20 equities ETFs and they only focus on Swiss stocks… Is this correct or am I missing something?
Hi Doni,
Ireland is indeed the second-best domicile for ETFs. Ireland has a tax treaty with the United States, so the U.S. will only tax the dividends at source at 15% instead of 30%. But this 15% is lost.
And then, for Swiss investors, there is no further taxation. So, there is no form to fill :)
I believe this is correct. We have very few ETFs in Switzerland, mainly because it’s a small market. But also because Ireland is already a great place for most of the European countries, so big players in Europe are domiciling funds in Ireland. And since we have access to these funds from here, it is not that big of a deal if they are in Ireland or Switzerland.
hi, thanks a lot for your amazing Vanguard-style work.
I was wondering: do you know from 2022 what will happen with the US-based ETFs for Swiss-based accounts on IB?
Will one hold what he has, and keep receiving dividends, or what? I was trying to find info about what previously happened to EU-based accounts, as I imagine the same could happen to the swiss case, but I could not find anything…
Thanks again, all the best!
Hi Giovanni,
I do not know for sure. But when I was using DEGIRO and they blocked U.S. ETFs, I kept my shares in the account. I just could not buy more. I am expecting that we can still receive dividends.
Now, I would imagine that IB would do the same. But the only way to know for sure is to ask them ;)
Thanks for stopping by!
Hi MTPS,
I’m trying to figure out what to pick once US ETF access will be denied in IBKR.
What do you think aboud Vanguard FTSE All-World UCITS ETF?
What do you think about looking at tracking difference instead of TER?
Thanks for the post.
Hi Azz,
My article has a section on world ETFs from Europe, including the one you mentioned, please read first.
I am covering tracking difference in another article: https://thepoorswiss.com/how-to-choose-index-fund-etf/#Tracking_Difference_and_Tracking_Error
Pardon, let me explain what I meant.
Based on your article about tracking difference and error, these two parameters seems to be more “complete” for a comparision between different ETF based on the same kind of index. So why do you use just TER (and of course size) to compare them?
Using tracking, it seems that the Vanguard one is the best (it’s probably also grown in the meanwhile, so even better). So, what do you think about that?
https://www.trackinsight.com/en/fund/IE00B4X9L533
https://www.trackinsight.com/en/fund/IE00B60SX394
https://www.trackinsight.com/en/fund/IE00B3RBWM25
https://www.trackinsight.com/en/fund/IE00B0M62Q58
Hi Azz,
Alright, now I get your question.
It’s a good point.
For huge ETFs with the same index, the tracking error will be almost entirely related to the TER. So it does not matter much which one we are using to compare first.
For smaller ETFs (like in Europe), it’s a good idea indeed to take a look at the tracking error.
In this case, it seems indeed like the Vanguard is doing well on the Tracking Difference metric. Now, these are not all the same indexes (FTSE All-World vs MSCI World). So, I am not sure I would use the Tracking Difference or Tracking Error to compare them. Some indexes may be easier to replicate than others.
In general, I just find it easier to use the TER to compare two ETFs. But if the TER and AUM are very close, I would indeed use the Tracking Difference to get a better view of what is going on.
Does that make sense?
Ops, I just thought that world is whole world but it seems it’s not! MSCI World does not include emergin markets and FTSE All-World misses small-caps, doh!
Anyway, thanks for your comment. Appreciated.
Hope we’ll have some better choise by next year.
Good day,
Perhaps I have analyzed your content too superficially for the time being, but I would like to observe that with a trading account with ZACKSTrade in the US (perfectly declared here in Switzerland), one has access and may well have continued access, in 2022 and beyond, to US ETFs. Or am I missing out on what this US broker (and any other US brokers, for that matter) may do in observance of upcoming European legislation on ETFs, come 2022?
Thanks. Appreciate you keeping up the excellent work, as your time permits.
Hi,
For now, a Swiss investor still has access to these U.S. funds indeed. Several brokers stopped offering us, but legally we can still trade them. I am using IB for that. But it’s good to know that we can do that with ZACKSTrade. I did not even know this broker.
Normally, U.S. brokers have to observe CH law and this law will come into effect in 2022. Although, it’s not entirely clear whether this means no U.S. ETFs for U.S. broker or not.
So, for now, EU investors have lost access to U.S. ETF, Swiss Investors still can access them, but 2022 may change that.
Does that make sense?
Once again, thank you so much for the work you have put here!
I believe it’s worth including the following Emerging Markets ETF:
iShares MSCI EM UCITS ETF (Dist): https://www.justetf.com/ch-en/etf-profile.html?isin=IE00B0M63177
It’s a Distributing fund with 0.18% TER, Physical replication with 2.2 billions in assets and relatively old (2005). From my understanding, it beats all the Emerging Markets ones you mentioned.
Hi Ilias,
Thanks for the kind words!
You are absolutely right. I do not know how I missed this one, maybe they lowered the price since I did that article. Anyway, thanks for mentioning it, I updated the article to use it instead!
Thanks for stopping by!
Hi
“A smaller fund means a larger bid/ask spread.”
Can you give some examples of larger spread in ETFs traded on the European exchanges?
Thank you.
Hi John,
I do not have any examples on the European exchanges, but you can find some great U.S. examples here.
Thanks for stopping by!
Hi!
I was researching about the “HSBC MSCI World UCITS ETF USD ISIN IE00B4X9L533, WKN A1C9KK” on justetf but could not find the KIID in English. Did you find it somewhere?
I don’t feel comfortable investing in a etf that the documentation is not in a language that I speak.
Kind regards,
Rudi Hrvatin
Hi Rudi,
It seems to be in English on this page https://www.justetf.com/ch-en/etf-profile.html?isin=IE00B4X9L533 for me. Isn’t that what you need?
Thanks for stopping by!
Thanks!
I found the trick, my region was set to Germany therefore the KIID only in German.
BR,
Rudi
Yes, justetf.com needs to be considered with your investor country :)
Hi Mr Poor Swiss
Thank you for your work and the awesome blog, great information on here!
I’m just getting into investing and I would love to hear your opinion:
It seems to me, that MSCI All World are at least 50% US. Also we have the S&P 500 in there, which is 100% US (if I’m not mistaken)
So why does it make sense to have these two in the portfolio?
Wouldn’t it make more sense to have S&P 500 and an “All World ex US” (which apparently doesn’t exist?)
Especially, since the S&P has outperformed the all world by a fair margin historically (I know, we can’t really use that as a benchmark, but more often than not, history repeats itself)
Would love to hear your thoughts!
Regards
Hi Rafa,
For most people, it does not make sense are you said.
In general, you want to get All World and then maybe a second one for the stocks of your country.
Or, you do not have a world ETF and instead, you have several ETFs for each regions.
In my case, I am increasing my position towards U.S. stocks. This is a gamble, I would not recommend everybody to do so!
I think the world ETF is a good diversification for now. But it’s true that the U.S. overperformed these last decades. So if you want to base on past history, it makes sense to have more U.S. stocks, but again, it’s probably not necessary and probably less safe.
Thanks for stopping by!
First off thanks for your blog and all the valuable info and experiences you share here!
I’m currently putting together my European ETF portfolio and deciding on the total world ETF.
The Vanguard FTSE All-World UCITS ETF (Dist) changed quite a bit compared to your info with 3.6B assets now and a decreased TER of 0.22%.
I probably still go for the HSBC MSCI World UCITS ETF with 1.6B assets and TER of 0.15% because of slightly better performance and lower TER. But the Vanguard World ETF is getting closer.
Hi FMS,
Thanks for your kind words.
Oh, that’s good to know that they reduced the TER. For now, I would still go with the HSBC fund. But it did not get any bigger while the vanguard fund grew by one billion.
I would keep a close look at the Vanguard fund that seems to be getting extremely interesting. If they go to 0.2% or below, I would take them over the HSBC fund.
Thanks for sharing your thoughts!