Swiss Investors May Lose Access to US-Domiciled ETFs
| Updated: |(Disclosure: Some of the links below may be affiliate links)
Update 2024: We can still buy US ETFs with IB.
Since the beginning of 2019, Swiss investors cannot buy Exchange Traded Funds (ETFs) domiciled in the United States from my previous broker, DEGIRO. This event is bad news for Swiss investors.
This problem is due to new regulations that will come into play. These regulations have already affected all European investors since 2018. But Switzerland was not affected before. We will see what has changed. These issues are based on several European and Swiss laws.
These laws are sad news for European and Swiss investors. I am not a legal expert, so this is only my interpretation of these laws. If I am wrong or I missed something, please let me know!
Normally, this should only come into effect in January 2022. But DEGIRO implemented this earlier, cutting Swiss Investors from the best ETFs available. I have now switched to Interactive Brokers.
In this article, we will see why this is happening and what our different options are. There are several possible solutions to this issue, but none of them is perfect, as we will see.
2024 Update
Before you read this entire article, you should know that as of 2024, we have not lost access to US ETFs with Interactive Brokers as Swiss residents. Some other brokers are still allowing it as well.
These brokers provide execution-only access to these US ETFs, and as such, they are not prohibited from doing so by the new laws. However, they cannot recommend these ETFs directly.
I do not think we have seen the last about these regulations. But currently, what matters is that we still have access to these ETFs.
PRIIPs Regulation for European investors
It all started in January 2018, when PRIIPs regulations entered into effect. PRIIPS is a part of the bigger Markets in Financial Instruments Directive (MiFID) II law. PRIIPs or Packaged Retail and Insurance-based Investment Products is a regulation that is supposed to protect investors. I will not go into details about the law.
I will only focus on the part that is the problem now. These regulations require all funds to provide a Key Investor Document (KID). This document must provide information about the funds and some standardized advice and recommendations to investors. Supposedly, it was made to ensure that all investors have access to all the necessary information to invest in these funds.
When this law came into force, U.S. fund providers did not provide any KID documents, so brokers stopped offering them to their European customers. For these fund providers, where most clients are from the U.S., providing these documents is not a priority. Doing so is too costly for little advantage. For instance, Vanguard already stated that they would not comply with these regulations. That means that for European customers, the only option is to use European ETFs.
Forcing people to invest in European Funds is what the European Union wanted. This law has nothing to do about protecting investors. It is only a strategy by European fund providers to force European investors to invest in their sub-par funds instead of better U.S. funds. Instead of providing better funds, they forced people to use their funds. Forcing people to invest in their funds is sad. This law is supposed to protect investors. But it is doing them a disservice by forcing them to invest in inferior products and reducing their investment options.
PRIIPs regulations are enforced to people from the European Economic Area (EEA). And Switzerland is not part of the EEA. Therefore, Swiss investors were not affected by this problem last year.
So why am I talking about this issue? DEGIRO just stopped offering these ETFs to its Swiss customers. I can still sell my positions. But I cannot buy any more of these ETFs. It is because of a new set of Swiss laws that will soon come into force. Let’s take a look at these Swiss laws now.
FinIA/FinSA for Swiss investors
In 2018, the Swiss government voted two new laws: the Financial Services Act (FinSA) and the Financial Institutions Act (FinIA). Once again, I will not go into details about these laws. They are more or less a copy of the European laws for Swiss investors. They also enforce each fund to offer a Key Investor Documented (KID) to all Swiss investors. So, they cause the same issue to Swiss investors that PRIIPS caused to European investors.
Once again, I have the same perspective on this law as I have on the other one. It is just a crude attempt to force people to invest in bad funds and block the U.S. funds instead of improving European funds.
This new set of laws will enter into force on January 1, 2020. However, several of the items will take longer to become active. From my understanding, access to U.S. ETF may be compromised only in 2022.
While I am not a lawyer and could definitely be wrong, the laws are only set to prevent actual recommendations of non-US ETFs. This means that the execution of trades on these ETFs is still allowed. So, as long as a broker is executing only for these ETFs, the law should not prevent the transactions.
From January 2022, brokers will not be able to recommend any US ETF to Swiss investors. At this point, many brokers have stopped offering access to these ETFs entirely.
Why did DEGIRO already enforce this two years in advance? It seems that DEGIRO started implementing them early for their own reasons. Supposedly, they believed this would protect the investors.
I think they are doing that to simplify their systems so that all Europeans have the same set of offers. This is a bad move on their side. There has been no communication whatsoever about this. One morning, my products were closed with the message “Product is closed for the client.” In my opinion, DEGIRO could have handled the situation better.
So, what can we do? I see a few solutions to this problem. Let’s examine each one.
Solution 1: Change broker?
If you want access to US ETFs, you must use one broker that allows it. It is what I did by switching from DEGIRO to IB. And I currently can invest in U.S. ETF. It is worth changing brokers just for this reason.
Interactive Brokers already stopped offering these ETFs to European investors, per the law.
Normally, this should not happen to IB for Swiss residents because IB is providing execution-only access to these ETFs. But if the regulations change or if the interpretation of the law changes, we will need to find a new solution.
Solution 2: Change funds?
Another solution is to comply with the new dumb law and switch to European-domiciled funds. We will not lose access to U.S. stock market indexes, only U.S. funds. There are equivalent Europeans tracking the same indexes. However, this is not a very good solution. European funds are more expensive and smaller. And there is less choice for funds around.
For instance, I will miss Vanguard Total World (VT). This fund replicates the performance of the entire world market. It manages around 17 billion dollars of stocks and has a Total Expense Ratio (TER) of 0.10%. It is made up of more than 8,000 different stocks. VT is a great ETF.
On the European side, there is no full world ETF, at least not in the acceptable TER range. The closer they get is with Developed World ETF. But that still means it is necessary to own several ETFs instead of a single one.
If I had to choose one European Developed World ETF, I would probably go with iShares Core MSCI World UCITS ETF. It has around 1600 stocks in 23 developed countries and manages more than 14 billion dollars. It has a TER of 0.20%. That is twice as expensive for an inferior fund. It is not bad, of course. But it pales in comparison to VT.
If I were to switch to the European equivalent of VT, I would probably have to hold two funds, and they would be more expensive than VT. So, I am not convinced by this solution. This is another sign that these laws are not doing anything good for investors.
To learn more, you can check out the entire ETF Portfolio with European Funds I would have used.
Solution 3: Use several funds?
The next solution I am thinking of is to use European funds but not a World fund. It is possible to replicate the performance of a world fund by holding several regional funds. Of course, it is still better to own the world fund if it is a good option. But in Europe, there is no great option for a world fund.
The Vanguard Total World (VT) ETF is composed of stocks from these regions:
- 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 ones and still replicate the world market fund’s performance accurately. That means we would need to hold four funds. You need one U.S. ETF, one Europe ETF, one Pacific ETF, and one Emerging Markets ETF. If you want to have better accuracy, you could also add Canada that is usually included in North America. Or you could find a North American ETF. But I did not find a good one.
It is not a great solution, but this would still beat a world ETF from a European provider. It would be a better TER. You can find U.S. ETF around 0.07% in Europe. And since the U.S. is about 55% of the VT ETF, this would bring down the global TER.
The problem is that you have four funds instead of one. I think that simplicity should be preferred in a portfolio. It may make rebalancing a bit more complicated as some funds may underperform or outperform the others. And you may have to change the allocations if there is a shift in the world’s economy. But I still think it beats having a 0.20% TER fund.
Solution 4: Be a professional investor
You may have noticed that I have talked especially about retail investors in this article. This is because both European and Swiss laws consider different professional investors and retail investors.
They only apply to retail investors. So, if you are a professional investor, you can still use the good old U.S. funds! I am not a professional investor, and I doubt that you are either. However, there is a kind of loophole in the Swiss version of the law. It states that certain high-net-worth individuals may choose to opt out of the law and be treated as professional investors. There is also this loophole in the European version of the law, but the conditions are slightly different.
In the law, a high net worth individual is described as one that:
- Either declare that they understand the risks of the investment under their qualification and have at least 500’000 CHF.
- Or dispose of at least two million CHF.
We can see that there is a loophole for the rich. The European Union does not want to hurt the rich in the European Union. This is another stupid part of this law. I am far from filling out these conditions yet. But it is not rare in the personal finance community to see people with more than 500’000 CHF. They could apply to opt-out and be considered professional investors.
Now, I do not know how difficult it will be to opt out. And I do not know if this will qualify you as a professional investor for taxes. In this case, capital gains will be taxed. That is something to consider. But it could be a very good option for people who already have a high net worth. It is something I may do in a few years.
FAQ
Why can’t Europeans invest in U.S. ETFs anymore?
Since 2018, PRIIPS regulations have disallowed European investors to invest in U.S. Funds. These regulations only allow investment in funds with a Key Investor Document (KID). And U.S. funds and ETFs do not provide this KID.
What are the PRIIPS regulations?
Packaged Retail and Insurance-based Investment Products are regulations to protect European investors. They prevent them from investing in funds without a Key Investor Document (KID), which in practice prevents European investors from investing in U.S. Funds. The need for KID is part of the biggest set of laws called the Markets in Financial Instruments Directive (MiFID).
What are the FinIA/FinSA laws?
The Financial Services Act (FinSA) and the Financial Institutions Act (FinIA) are the Swiss equivalents of the MiFID laws from the European Union. These laws will enter into effect in January 2020 but will only affect foreign brokers in 2022. Effectively, they should prevent Swiss investors from investing in U.S. funds.
Conclusion
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The possible future loss of U.S. ETFs is sad news for European and Swiss investors. The best alternative is to invest in European funds, but they are more expensive and offer fewer choices.
I think that the people who crafted this law did not care about Swiss investors but only about European fund providers. There is no doubt that this will profit European funds. Maybe in the future, it will increase their quality and price. But I am not very confident about that. It is a local lockdown of the market. Instead of protecting the customer, they are locking him into inferior choices.
Because DEGIRO handled this law poorly, DEGIRO users had already lost access to U.S. ETFs several years in advance. I lost confidence in DEGIRO, so I switched to Interactive Brokers.
Currently (as of 2024), since IB is providing execution-only access to these ETFs, we can still trade US ETF with IB.
If you are still using DEGIRO and want access to U.S. ETFs as a Swiss Investor, I recommend switching to Interactive Brokers.
To see an ETF Portfolio without any U.S. ETF, take a look at my European ETF Portfolio.
If you are considering U.S. ETFs, you may want to read about the U.S. estate tax.
What about you? What will your strategy be when we do not have access to U.S. funds anymore?
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Dear Baptiste,
What about the US brokers for the Swiss nationals and residents? I have an account with an US broker and it allows me to buy or sell US ETFs?
Hey there, very sad news indeed. I guess the Europeans want to have a grip on inheritance tax, hence this law, although it does not apply to Switzerland.
Question: did you ever have trouble claiming the 15% US withholding tax on you US ETF dividends? Thanks
It’s a sad news if this happens to be put in place, but as written in the update, this is unlikely to change.
No, I never had trouble for that. As long as you have the minimum of 100 CHF in deductions, this should be good. But I know that same cantons are quite picky when you always claim some deductions from mortgages.
The reason they are implementing this, is so that the US does not impose inheritance tax on European investors…. and to support the industry of course.
But yeah, for Switzerland this non-sense because we have the inheritance treaty with the US
Hey Phil, question here: is it possible to claim the 15% US withholding tax on US ETFs?
I thought we can only reduce the withholding tax from 30% to 15% by filling in form W8-BEN.
Are you saying that we can also claim the remaining 15%?
Kind regards,
Jürgen
Yes, we can, that’s the main advantage of US ETFs :)
Yep, that is the main advantage indeed and a lot of people dont know this
Dear Baptiste, please adjust the contents of this post. It’s not accurate to state that IB differs from other brokers that operate in CH in terms of purchasing US ETFs. I had an account with CornerTrader, moved into IB this year after reading your posts, and now face the very same challenge – in summary, without signing the terms to be qualified as a professional investor and possessing a minimum amount of assets, I am NOT allowed to purchase US ETFs via IB. Please clarify this immediately to avoid inappropriate actions/decisions from your readers/community. Regards!
There is nothing to adjust Marcello. We still have access to US ETFs at IB, I bought some recently. In fact, some Swiss brokers also have access to US ETFs, like Swissquote and Saxo.
If you do not have US ETFs access on IB, you need to open a ticket with them and tell them you should have this access since you as a Swiss resident, you are not subject to the same rules as a EU resident.
> On the European side, there is no full world ETF, at least not in the acceptable TER range.
What about VWCE – Vanguard FTSE All-World UCITS ETF Accumulating (ISIN IE00BK5BQT80)?
It’s quite decent, at 0.22% and a significant size. I prefer VWRL because it is distributing. But it’s still 3 times more expensive than VT. Although, that remains a great ETF if we do not have access to US ETFs.
Dear Baptiste,
Many thanks for your excellent explanation. Does it matter if you are using IBKR UK or IBKR LLC (US)? I am with IBKR UK and just moved from the UK to Switzerland. IBKR is unwilling to give me permissions to trade US domiciled ETFs, even after changing residency status. This is not about trading permissions as I can still trade UCITS ETFs.
Best wishes,
Bertrand
Hi Bertrand,
No, it does not matter, most Swiss investors are with UK.
You will need to insist by creating a support ticket for them to give you US ETFs permissions. Unfortunately, it is not always automatic :(
You are right. I insisted and can now indeed trade US domiciled ETFs. It could also have been due to a delay of getting my residency approved. IBKR support gave confusing and inconsistent motivations at first. If they weren’t reluctant, perhaps they may have been confused by the regulations themselves.
Unfortunately, it’s a known issue that the IBKR support is confused about Switzerland. So, insisting is often the only way we have.
Having changed my residence from Switzerland to an EU country, I’m now feeling the pain of this. There is another workaround for some funds: you can still get units assigned via options.
The stupidity of all these consumer protections is that they push people to find exotic solutions that can be considerably more dangerous than the original.
(A little example: I’m now not allowed to withdraw cash from IB if it would cause me to go short the relevant currency, even though I have a huge amount of margin available. The solution: short a stock that trades in the currency of interest, transfer out the cash, close the short position, leaving me with a negative balance for that currency. Complete madness.)
Hi,
Thanks for sharing.
You are right, that you are allowed to buy options to work around the issue. The main problem is that it requires you to buy 100 shares at once.
Is that limitation for getting short on currency related to the EU?
I believe it’s related to MiFID, so applies to the EEA and UK. I never had this issue when resident in CH.
I manage the portfolio of a relative who is resident in Georgia and IB imposes a few controls, like requiring you to pass a test before trading anything they consider leveraged, but otherwise it’s free and easy. Let’s hope that Switzerland resists the urge to close down everything for retail investors.
Thanks, that’s interesting!
And yes, let’s hope these stupid laws don’t come back to Switzerland.
Hey Roving Rodent,
I’d have a question, but maybe it’s a stupid one: when you moved out of CH and changed residence to an EU country, could you at least keep your positions of US-domiciled ETFs? Do you still receive dividends as you used to?
It’s clear that we can no longer buy US-ETFs when residing outside CH, but what about holding on to existing positions?
Hi Jürgen
There are no stupid questions :)
I had a bunch of US CEFs (closed-end funds), no ETFs. I still have the shares, receive dividends exactly as before and can sell, but cannot buy more shares. I don’t imagine it would be any different with ETFs.
also very interesting article, thank you, , curious what will happen in the future …
Thanks! Yes, this will be interesting to follow. Let’s hope nothing happens!
What about the option to invest through a broker that is not in the EU and US such as Israel? Isn’t that also an option?
Hi Hanan
As far as I know, this would not change anything. What matters is the residency of the investors and not the residency of the brokers. Even an Israeli broker should obey regulations for EU investors.
Hey Baptiste
Your 2024 update contradicts the whole article, sadly without explanation.
Ny allowing Swiss citizens to vuy US ETF in 2024, does IB (or worse, we as.investors) act illegally? I don’t understand that part.
Best regards!
Hi,
Basically, the law from 2022 did not force trading these ETFs but only advertising these ETFs. This law allows execution of these ETFs, which is what IB is doing.
There is nothing illegal about buying US ETFs.
Hey Baptiste,
awesome content, keep it up! 🙏
1) If it happens that we can’t buy anymore US ETFs as Swiss residents, what will happen to the already invested money? Could we keep it there or are we forced to move it?
Will it make sense to transfer everything to EU and invest everything together? That could mean sell an ETF earlier than expected, maybe too early after starting investing, which could imply a loss..
2) At the moment there are no extra taxes that pay as Swiss resident when buying US domiciled in the US, right? Just the withholding 15% that we can get back from taxes by handing in a DA-1 form with tax declaration. What would we do if the US add some extra taxes at some point or the treaty US/CH would change? We will probably will need to sell, that could mean again – selling an ETF earlier than expected if too early after starting – which could imply a loss..
I know that “what if”… questions don’t help, there could be also new taxes or changes in EU or CH regulations – even though they would probably and hopefully would hurt us less than changes by the US; anyways, the goal of my questions is to check whether I understand how things work, I am not implying US ETFs are a bad choice, I am just on a learning path.
What’s your take on these topics?
Thanks!
Kind regards!
Hi Eva
1) When this happened in the past, people could keep their shares but not buy more. If you sell and ETF to buy another one, this is not a loss, simply a transfer. I would likely still use IB if I did not have access to US ETFs, but the benefits would be lower indeed.
2) Correct. If there are new taxes, we will do the math and see whether US ETFs makes sense or not anymore. But there is no way to know that in advance. And same thing, switching to another ETF is not a loss!
Hey Baptise,
thanks for your help!
When you say “switching to another ETF is not a loss”, I guess “switching” means sell the old and buy a new, isn’t it?
If so: if we are to sell an ETF due to some of those “sudden” reasons at a point in time we did not plan and that is too early in our long-term horizon, it may mean a loss if the price of the ETF is low due to volatility and we did not earn enough yet through compound interest and capital gain (as we could not wait the long term time frame; we are force to sell only few years after buying).
Is it a possible and reasonable scenario?
Thanks!
If you need to sell to use the money, you may indeed be forced to sell at a bad time (down market). But there is not much you can do to protect against that.
But if you need to sell ETF A and buy ETF B, there is no loss, you are simply transferring money from A to B. The money stays invested.