Swiss Investors May Lose Access to US-Domiciled ETFs

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:

1. North America: 58.40%
2. Europe: 18.60%
3. Pacific: 13.30%
4. Emerging Markets: 9.40%
5. Middle East: 0.20%
6. 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.

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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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