Welcome back RIPvestors, time has come to get back to my investing series.

We’re going to cover the very large ETFs world in this post, the preferred mustachians instrument to join the stocks party!

Disclaimer: I’m not an expert on this subject. I’m here to share what I know with you, my novice reader, since I think it’s more than enough to get started with ETFs. I’m here to learn more on ETFs from you, my dear expert reader, so that I can improve my knowledge and act better.

Another Disclaimer: I’ll run a simulation and finally pick an ETF at the end of this post. I’m not affiliate to the financial institution emitting the ETF. I actually own ~100k USD in shares of this ETF, so it’s a product I recommend because I’ve direct experience with it. I’m not here to sell you something!

Other posts in the Investing series:

• Investing basics
• Financial Investing
• Funds Investing
• Fees & Taxes
• Stock Price and Market Model
• Investor Profile and Lifelong Investing Strategy
• ETF 101
• Stick with it
• My take on Cryptocurrencies – Part 1: The Ugly
• Interactive Brokers 101

Intro

“Hey RIP, what’s an ETF?“

Hello friend, long time no see!

We’ve seen in a previous post what generic investment funds are and the difference between actively and passively managed and how we should aim to invest into passively managed ones.

We’re going to explore here the Fund Structure, i.e. how the fund capitalization is collected, how profits are distributed and how shares of the fund are traded. We’re going to explore 2 different fund structures: ETF and Mutual Funds.

A possible structure is the following: you want to join the fund, decide which amount you want to invest on it, deposit the amount to your fund account and then you own a fraction of it. The total fund capitalization increases when new investors join. This extra money is used by the fund manager (or by the algorithm) to buy new assets according to the fund strategy. If you want to disinvest, the fund manager is forced to buy back the number of shares you want to disinvest at its current market value. The total fund capitalization decreases when investors quit. It means the fund may need to sell assets to pay back the quitting investors. This is the common pattern of Mutual Funds.

Another fund structure that’s getting every year more popular is the Exchange Traded Funds. ETFs capitalization respects the closed-end model, meaning that no money flows in or out of the fund once created – with some exceptions (accumulating funds). So at creation time the fund size is defined and so is the individual share size. Shares are then traded on stock exchanges like regular stocks. Initially all the shares are held by the institution who issued the fund (the trust company).

An ETF can be liquidated, which means:

• the trust company sells all the assets
• each shareholder redeems their shares
• the fund then disappears.

Let’s make an example: I want to create an ETF with 100,000 CHF of capitalization and shares of 10 CHF, an unrealistically small fund. My fund will than have 10,000 shares initially worth 10 CHF. No matter how many investors will come and go, the fund will always have 10,000 shares.

My fund invests on stocks of italian companies that produces Mozzarella. With a capitalization of 100K we buy 1K shares of MammaBuona, 30 CHF each, and 1K shares of PizzaBella, 70 CHF each.

The day after buying the stocks, MammaBuona performed great and their share is now worth 40 while PizzaBella performed poorly and its share is worth 50. Total value of the fund portfolio is not 90K and so each share is now worth 9.

“Wait, RIP, what does it mean that ‘a share is worth 9’? Aren’t they traded like regular stocks? So they are not strictly bound to their basket value… they may go crazy due to other factors, like normal supply/demand. is it correct?“

Good point. Here things become a little bit obscure to me. You’re technically right, things traded on a stock exchange can go crazy. Let’s say your fund management skills demonstrated you beat the market everytime, then investors may be willing to pay more than the market value of the assets in your basket, since you’ll surely beat the market again. I lack knowledge here. Wikipedia explain that: “The ability to purchase and redeem creation units gives ETFs an arbitrage mechanism intended to minimize the potential deviation between the market price and the net asset value of ETF shares“. So let’s set this problem aside for a while. Well, let’s say for ever, I won’t come back on this.

“Ok, cool, but why do you advice ETFs and not Mutual Funds?”

That’s just personal taste. In US they love MFs slightly more. They have Vanguard, which is the best mutual fund company ever. Accessing Vanguard funds from Europe is more complicated and has financial implications (US Estate Tax, US dividend withholding…)

I personally prefer ETFs over MFs for the following reason: MFs bind you to a specific financial institution, while ETFs don’t. They may change their trading fees, they may go bankrupt, they may do aggressive marketing and force you to open other financial instruments with them (like bank accounts, credit cards…). Every bank has their “awesome funds you should buy” and a cool financial advisor that “works in your best interests“.

ETFs are kind of open source. Once they lift off they require less management (no external cash flow to handle) so it’s easier to make them passively managed, getting in/out is instant and cheap and they usually have lower Total Expense Ratio (TER). You don’t need to join any bank, you just need a broker to access the stock exchange(s) where the ETF is traded. ETFs are rapidly becoming the de facto standard for low cost fund investing, i.e. passively managed index funds.

Some may argue trading ETFs has 2 points of failure instead of one: the broker and the trust company managing the fund. My reply is that both have few (zero?) connections with the fund managed assets. And the closed-end structure cuts off some of the malicious strategies like Ponzi / Madoff schemes.

For the sake of completeness, here‘s a good article about why invest in Mutual Funds instead of ETFs.

“Ok, cool, please RIP tell me more about stocks ETFs“

Sure. We’ve previously discussed why you want to track Stock Indexes and why you want to differentiate among them. I’ve also disclosed my Asset Allocation so you know which indexes I want to track.

ETFs are tools to make your strategy happen, they are not a substitute for your strategy.

…Or are they?

Ok, let’s digress a little bit on the cost/control spectrum, i.e. how to implement your diversification strategy among the stock component of your portfolio. Usually delegating control (simplifying) comes at a cost. You could:

• Buy individual stocks, and manually diversify. Total control, low maintenance costs. Well, costs may not be very low since you might end up frequently trading low volume stocks to rebalance your portfolio incurring in high trade fees.
• Buy N funds that track stock market indexes and keep their value balanced (according to your strategy). You may hold a US S&P 500 Fund, a Europe Stoxx600, an Emerging Market, a Pacific… and rebalance yearly/by-quarterly/quarterly/monthly. Minimal costs, good control.
• Buy a single World fund that tracks the entire world market, like the MSCI World Index or FTSE RAFI All-World 3000. A fund tracking such indexes keep self balancing to reflect world market capitalization and – in each market – to reflect company capitalization. Can be seen as a “fund of funds”. Given the slightly more complex behavior, usually world ETFs have higher costs (TER), in the order of 0.2 – 0.3 vs <0.1 of funds that track geographic (US, EU…) stock indexes. So, higher costs but less control. You may even buy more World funds to avoid keeping all your eggs into one basket, where the basket is the trust company managing the fund. You may even open more brokerage accounts to hedge against points of failure…
• Use a Robo-advisor. Robo-advisors are (Wikipedia): “a class of financial adviser that provide financial advice or portfolio management online with minimal human intervention“. Essentially they are bots that keep your assets balanced, buying and selling shares on your behalf, according to a strategy. You throw money on your account and your robo-advisor knows how to allocate it. You want to withdraw from your account and your robo-advisor decides what to sell. This service comes at a price on top of the funds’ TERs. Here‘s a good US-centric article about robo-advisors. Popular robo-advisors are: Betterment, Wealthfront, Truewealth (available in Switzerland). We’re not going deep there for now. Check out this MMM post about Betterment, this TSD post about Wealthfront and this JLCollins post about Vanguard for more info. Even higher costs, zero control.

I know people who operates at each level of this spectrum. Personally I adopt the “Buy N funds” approach. Minimal complexity and minimal costs.

Now we can finally dive into the mechanic of a single ETF tracking a single Stock Market index.

“Is that all you can do with stocks? I heard about High Frequency Trading, Option Writing, Dividend Growth Investing…“

Sure, there are countless opportunities, I know. It’s just that I’m a novice investor and all my limited knowledge is about long term investing on Stock Market Indexes. I don’t care about speculative high risk short term investments, I’m not a daytrader and I don’t wont to become one.

I’m both curious and suspicious about long term optimality of Dividend Growth Investing though. DGI means holding stocks of companies who have a long track record of having emitted constantly growing dividends over time. Here‘s an amazing introductory article on apathyends blog. Other excellent articles here and here. The good of DGI is that it’s a passive revenue stream without you having to touch the principal. The bad is that a company that issues growing dividends over time limits their potential long term growth. It’s not a coincidence that the strongest companies on the market today don’t issue dividends. Anyway, let’s just not waste time here to discuss this.

“Wait, why just stocks? Why not go for angel investing, estates, precious metals, cryptocurrencies…“

Wait wait wait, let’s step back. First you do your homework by asking yourself the following questions:

Q: What are your financial goals? Why are you investing? Short term? Long term?
(Mr RIP) A: I want to to reach FI and would like to live off of my portfolio profits forever.

Q: When will you need your money back? How much risk and volatility can you handle?
A: Ideally I’ll die at incredibly old age with my money still invested. I still need to be able to periodically withdraw something from my assets (ore use dividends/interests/profits). I can accept high volatility on a portion of my assets, given higher expected returns.

Q: What you feel comfortable investing in?
A: Nice question, thanks for asking 🙂 Well, this requires more space and time to elaborate, take a look at my IPS. Tl;dr: my AA (Asset Allocation) cover all the risk/reward spectrum, from super safe no reward (cash) to low risk low reward (bonds), average risk high reward (stocks) and potentially, in future very high risk high reward (angel investing / startups).

Q: Do you understand your investments?
A: Yes, I know the products I’m investing in, I’m in control of my portfolio. I made my investment choices and I’m ready to adapt them given new evidences. I know the risks. What I don’t know yet is my reaction if (when) things will go south. Will I be able to not panic? Life will tell.

“Ok, ok, I got it. But I also heard of Small Cap, Large Cap, Tech, Finance, Banking and a lot of other sectors that have indexes. How am I suppose to pick my indexes? Just by geographic ares?“

That’s a very personal question. Each one has their own taste and want to place their bets. My personal opinion is that sector-specific investments are inferior differentiation techniques – but I invest in a US Tech ETF, home biases die hard – while market capitalization categories are good tools to differentiate in risks/reward. Historically small caps have better returns but higher volatility. I differentiate among Large-Mid-Small Europe and Large-Small US.

Ok, let’s get back on track. You know your goals, you control your Asset Allocation and time’s finally come to pick the right ETFs to implement (part of) your strategy.

We’re finally ready for…

ETF 101

JustETF

I’ll walk you into the ETF world by simulating the decision making process to pick an ETF based on an index I want to track, which is S&P500. I’ll take screenshots from JustETF, my preferred online ETF browse tool.

I recommend you to take a look at their how-to page for an overview of geographic markets, indexes, capitalization categories and sectors.

As soon as you get familiar with the tool you can go and browse ETFs with the ETF Screener

ETF Features you should care about

Tracked index

The stock index you want to track. For our simulation S&P500.

My search returned 15 results, great. Note: your search may return different results. JustETF asks you to define your fiscal country and shows you only ETFs available for you.

So far, so good.

Fund Size

Fund size tells you the total value of the assets owned by the fund. While a large size is not optimal for Mutual Funds, it is very welcome for ETFs for the following reasons:

1. Lower ask/bid spread: small volume means few people trading fund shares. You want to sell today? Maybe you need to wait or accept a sell price significantly lower than the market. Want to buy? Higher than the market. That is called spread.
2. Lower costs: costs for handling more assets don’t scale linearly.
3. better replication: we’ll discuss this later.
4. Less risks: it’s rare a large and solid fund goes bankrupt or disappear without consequences.

So, let’s set our filter to catch Large funds:

Eight ETFs are still available.

Total Expense Ratio (TER)

We’ve previously discussed the importance of fees and how they exponentially compound over the years. TER summarizes yearly operating costs for the ETF, expressed in percentage of fund size. Usually in the range of 0-1%. Beware of funds with TER greater than 1% and in general, the smaller the better.

TER is an important factor to minimize but don’t micro-optimize for it. A difference of 10 basis points between two TERs might be swiped away by other factors like tax efficiency.

These are our 8 surviving funds sorted by increasing TER:

Use Of Profit

What does the fund do with assets’ profits (dividends for stocks)? There are two strategies here: Accumulating and Distributing.

A Distributing fund distributes profits among the shareholders every time the underlying assets distribute profits (dividends, in case of stocks).

An Accumulating fund reinvests profits according to its current strategy.

Which one is better? It usually doesn’t matter much. Unless there’s a big difference in how financial profits are taxed in all the countries involved (your country of residence, the country where the fund is domiciled, the country where the underlying assets are traded) it’s just a matter of personal taste.

Distributing funds focus on income, accumulating funds favor wealth appreciation. Tax and fees excluded it’s essentially the same. You can take dividends of a distributing fund tracking an index XYZ and use those dividends to buy new shares of the same fund and achieve the same performance of an accumulating fund over the same index XYZ.

Case of study: Switzerland

In Switzerland profits are taxed as income, while capital gain is not taxed. It means assets appreciations are not taxed, while the profits they generate are.

If you buy a stone for 100 CHF and sell it for 1000 CHF you take the difference – unless you’re a professional stone trader, in that case it’s profit and taxed as such – if you rent the stone for 10 CHF per month, the rent is taxed as income.

“I got it! I got it!! On accumulating ETFs you don’t pay taxes! It’s all capital gain and no profits!”

I’m sorry my friend, as you may expect the tax authority is not dumb. In general, tax authorities are smart enough you can’t play against them. You risk something horrible trying to outsmart them, like having the entire capital gain taxed as profit!

The ICTax (Income and Capital Tax) department of the FTA (Federal Tax Administration) produces every year a list of all the financial products recognized by them. If your accumulating fund is on that list, then they either know when the assets owned by the fund distribute their profits or they just make up a fictional “profits distribution date” and a precise enough “profits amount“. If you own the fund on that date, you earned profits and they will be taxed as such on next year tax declaration.

“What if my fund is not on that list?”

In that case all the capital gain is considered profit and you pay taxes on it. Avoid it. Always check that your fund is on that list!

For example, here’s my STOXX600 Accumulating ETF:

You can see the ISIN (International Securities Identification Number) and some of the fund details, like the fact it’s an Accumulating fund.

They have no data shown for 2017 dividends (we’re still in May at the time writing this article), they have no data for 2016 (that scares me, original taxes deadline was end of March) but they have data for 2015:

Here you can see:

• The fund share value on December 31st 2015 – 76.70 CHF (lol, it dropped to ~61 EUR when I started investing in February 2016) – that you should use for your wealth tax (oops forgot to mention we have a Wealth Tax in Switzerland that range from 0% to 0.6% of your net worth each year)
• The fictional profit distribution date – November 30th.
• The value of the profits – 1.827 CHF per share (dividend yield 2.38%)
• A simulation for 1000 shares – assets value 76.7k, profits 1.8k. Assuming marginal tax bracket of 30% the expected tax bill is 550 CHF. [Personal note: Ouch, on ~250k CHF I had invested on December 31st 2016 I may expect 5k profits (2% yield) and ~1.5k taxes for 2016 (and north of 2k on 2017) maybe I should account for that in my NW spreadsheet :(]

“I got it! I got it!! I should sell the fund the day before the fictional profits distribution date and buy the fund back the day after! Since the fund is accumulating I don’t expect any loss, except 2 days of regular market fluctuations”

Good luck with that! There’s a caveat: the FTA could classify you as professional trader and – listen to me carefully  – you don’t want that! If you’re a professional trader everything (including capital gain) is taxed as income.

So if your accumulating fund appreciates 10% this year while the underlying assets distribute 2% dividends (expected S&P500 dividend yield for 2017), you pay income taxes on the whole 10% if you’re a professional trader while just on 2% if you are not.

The actual guideline to avoid being considered a professional trader is: any asset you buy, hold it for at least 6 months. That’s a guideline, not a strict rule. If you play fancy you may be classified as professional trader nevertheless and if you sell assets before 6 months holding period once in a while you may still be classified “a regular person who’s managing their wealth“.

“Ok… and what if I play as a professional trader or buy an accumulating fund not in the list (that issue dividends anyway) but at the end of the year the fund or my whole portfolio loses money?”

That’s a tricky situation and I’ve never experienced that. In theory you don’t pay income taxes you would have paid otherwise. Not that it’s a situation that I hope, having my fund depreciating for a fiscal year… Anyway, I wouldn’t play it hard. I suspect being a professional trader is kind of viral, so you’ll pay the consequences on bull market years.

For the sake of completeness, I must mention that some Swiss companies issue special dividends named KEP (Capital reimbursement) that is not considered income. So you may find some Swiss ETF where dividends (or big portions of them) are not taxed.

Domicile

Assets have a domicile, they’re fiscally registered somewhere. If you buy a share of Coca Cola, it’s an American company, domiciled in US and traded on NYSE – New York Stock Exchange (Wall Street).

Funds have a domicile too and it’s totally uncorrelated with the assets owned. You may launch a fund domiciled in Italy that holds German stocks and that is traded in London Stock Exchange (LSE)

Why is that important? Taxes, obviously!

Case of study: Switzerland

Disclaimer: I’m not suggesting anything illegal! It’s perfectly legal to hold assets domiciled abroad and to benefit of some advantages (not many though).

We’ve already discussed profit vs wealth vs capital gain taxes. There are other tax implications you want to consider: withholding taxes. Funds domiciled in Europe and US generally withhold part of the profits the fund makes as anticipation of the actual taxes you should pay. It’s not the fund that withhold the tax, it’s the national tax authority of the country where the fund is domiciled.

In Switzerland you may deduct from your tax bill the amount foreigner tax authorities withhold from your funds. So it may seem a tax neutral process: instead of paying 100 in Switzerland you pay X in the nation where your fund is domiciled, and the remaining 100 – X in Switzerland. It’s cool.

Except it isn’t a pain-free process. You should get fiscal documents for tax withholding from the foreigner tax authorities and file them at tax declaration time.

At beginning of 2016, when I performed my deepest research in this field, Ireland and Luxembourg were popular countries for funds domicile since they don’t withhold anything for investors resident in Switzerland. I don’t know if anything changed in the meantime, I’m not keeping myself up to date on this. According to shared knowledge among invest-savvy friends and colleagues it’s still true.

So, investing in funds domiciled in Ireland and Luxembourg makes your tax declaration easier – again, that’s perfectly legal, there are no tax actually saved just a pain-free tax declaration process.

“Cool, so let’s filter our ETFs by domicile now 🙂”

…But there’s one exception!

US always withholds 15% (or 30% for investors resident in US) of profits at assets level.

“Ok, what’s the problem? I don’t invest in US!”

You sure? Don’t you want to invest in S&P500? Or a World ETF?

“Yeah, but I’m going to pick a fund domiciled in Ireland, I’m smart!”

The withholding is at assets level! It means as soon as companies issue dividends, US government takes 15% of it and uses it to produce more bombs. If your fund is accumulating, your share value reflects that immediately. If it’s distributing, the fund receives a dividend which is 85% of the original dividend. The problem is that it’s not you that are being taxed. Your fund is. No way you can redeem that. You end up paying double taxation on the dividends!

“Oh no 🙁 we’re all doomed now, there’s nothing we can do…”

Not true. You can redeem the 15% withholding tax if and only if the fund is domiciled in US via the DA-1 Form (more info here).

“Hooray we saved the world!”

Well, there are other implications like US Estate Tax, i.e. if you die while holding a US domiciled fund your heirs will be taxed (potentially a lot)…

“Nooo, the world is doomed again… So? What to do?”

Personal taste, as always. Quantity matters.

Let’s do a case study (myself) within this country level case study (Switzerland)

Nested Case Study: myself

As December 31st 2016 I owned US based ETFs for ~140k USD (94k S&P500, 48k Tech US). They are all domiciled in Ireland. Let’s see how much I am leaving on the table by not switching to US domiciled funds (assuming funds with same costs and performances).

Assuming 2% Yield on S&P500 and 1% Yield on Tech (a lot of big tech companies don’t distribute dividends), profits are expected to be ~2360 USD (1880 from S&P500 and 480 from Tech).

My unredeemable withhold tax is ~350 USD.

I’m leaving 350 USD on the table.

What do I get for 350 USD each year:

• Simpler tax process
• No estate tax (though it may be close to zero for such “small” amounts)

Is it worth changing strategy?

I don’t know. I’m lazy. Buying/selling at 0.08% trade fee each trade costs ~240 USD one-off. I’ll think about it.

Anyway, back on justETF. Let’s filter ETFs domiciled in Ireland or Luxembourg!

All 8 funds are still available – all of them are domiciled in Ireland or in Luxembourg – cool!

Index Replication

A fund matching S&P500 index is supposed to own assets that emulate the actual S&P500 basket, i.e. stocks of the top 500 US companies. How many stocks for each company? Enough to replicate the relative weights of each company within the index basket, i.e. the relative market capitalization.

For example, if Poca Cola market capitalization is 100 and Apfel 1000 (I just made these numbers up), the value of Apfel stocks in the fund should be 10 times the value of the Poca Cola stocks.

Having a fund that owns stocks in the exact proportions (and keeps them balanced regularly) is very hard, not least because it would have to be very very large. Think about Berkshire Hathaway (Warren Buffett and Charlie Munger company) stocks. A single stock is quoted 243k USD (May 2017) and its weight within the S&P500 is 1.51%, which means that holding a Berkshire Hathaway stock requires 16M USD to keep the fund balanced. Let alone that there are funds smaller than 16M USD around, if your fund capitalization is 20M there’s no way they can perfectly replicate the index!

“Whaaat? So they are liars!!”

Well, no. They’re allowed to approximate the index, given it’s clearly stated. That’s called Index Replication Strategy.

I’m aware of two families and several strategies within the families.

First family is Physical Replication, i.e. the fund owns actual stocks. It can be Full Replication where, as you may imagine, the actual index is perfectly replicated or Sampling where the fund owns a subset of the stocks guaranteeing a low deviation from the index. Sampling is adopted when Full Replication is impossible (fund capitalization too small) or inefficient (too many trades and small quantities traded, i.e. fund still not big enough). Here a nice article about Full vs Sampling.

Second family is Synthetic Replication, where instead of actual stocks the fund owns collaterals, swaps and other derivatives… I don’t know you, but I prefer to avoid another point of failure in my chain so I try to avoid them. Here more info from investopedia.

Anyway, let’s filter for Full Replication!

Still 4 funds left! How to choose? Well, let’s look at the performance.

Tracking Error – Performance

No matter how perfect and real time rebalanced a Replication strategy is, your fund will always perform differently compared to the index it tracks. The term Tracking Error indicates how closely a portfolio follows the index to which it is benchmarked. There are mathematical formulas to calculate the TR, usually as a standard deviation of value difference between fund share and index over time… But who cares about these boring details?

What matters is: given several funds that track the same index, which one performs better?

The answer may seem obvious: the one who performed better so far.

Which is mostly how I evaluate funds after all other aspects have been took into account. Just remember that even few consecutive years of “better performance” of a sepcific fund may mean nothing if its Tracking Error is high. Good performances might have happened by luck and thanks to lucky sampling (see replication). Aim to lower standard deviation (volatility and risks) instead of getting tempted by returns above the market.

What are the performances of our finalists funds?

You can see that the first one (iShares) is accumulating and the other three are distributing. I didn’t filter by “Use of Profit” on purpose. Didn’t have any preference.

From a performance point of view the first one outperformed the other three since forever, excluding last 3 months. And it has a smaller TER. Aaand 10x Fund Size (except against Vanguard). I assume returns include reinvested dividends for the two distributing funds, it wouldn’t make sense otherwise.

So we have a winner, iShares (by Blackrock) Core S&P 500 UCITS ETF (Acc).
Here‘s the profile and here‘s the factsheet.

“Super, thanks RIP! I want to buy it, how do I do? Should I call BrackLock and ask??”

Uhm… first of all it’s called BlackRock. Second, you need a broker and that’s the main topic for next post (Interactive Brokers 101). But let’s explore few preliminary activities you want to do before entering a BUY offer on your broker.

From Funds to Shares

You have your ETF and you want to buy shares of it. How does it work?

Each Security has a unique identifier called ISIN. Our ETF ISIN is IE00B5BMR087.

Note: first 2 letters indicates country of domicile, Ireland in our case.

Note: if you want to check an ETF profile given its ISIN on justETF, just alter the url:

https://www.justetf.com/en/etf-profile.html?isin=YOUR_ISIN

“Awesome, where should I enter my ETF ISIN in my broker application??”

Calm. The ISIN is sometimes not enough to buy an ETF.  Why? A single ETF may be traded on different Stock Exchanges, in different currencies, with different Ticker Symbols. A Ticker is a unique identifier for a particular stock on a particular stock market. And yes, your ETF shares are stocks.

So you need a ticker. Let’s look up for our ETF ticker(s). Just click on the Listing tab of the profile page on justETF.

aaaand…

Hoooly craaaap! 8 tickers (wait, weren’t they supposed to be unique?)! 6 Stock Exchanges!! 5 currencies, including Pence Sterlings!!

Well, we picked the biggest (by market size) ETF, domiciled in Ireland, tracking a very popular stock index like S&P500. What did you expect?

“Ok, so… which one is the one I want to buy?”

Again, personal taste. I must admit my knowledge starts to fade a little bit while in this dark territory.

Let’s take a look at the currencies first. Your Fund owns assets that are evaluated on a certain currency. For example, S&P500 tracks US companies so the underlying assets currency is USD.

Does it matter? Well, a little bit. If you own a Car Wash in US and if the USD loses half of its value against EUR – and you measure your wealth in EUR – you’ve lost half of the money. If you own a share of a global company (say Apple) even in case the USD worth half a EUR when Apple sells iPhones in Europe they would make way more USD than they make now, and their stocks would grow (in USD).

What I’m claiming here is that Globalization acts as an hedge against currencies fluctuations.

There are Currency Edged ETFs. Beware of them though. The reduced volatility is not worth the cost in the long term.

So, in the end, you shouldn’t care about underlying assets currency for Large Cap stocks (like S&P500), while it matters a little bit for Small/Medium Cap, which might operate only in their country.

“So… should I buy the one listed in USD?”

Don’t rush my friend!

And btw, we only discussed the currency of the underlying assets, not the currency of the ETF shares.

Technically, the performances of your ETF are not impacted by the currency of how shares of your ETF are traded. That should just be a convenient currency for you. Every currency conversion comes at a cost, minimize them!

Beside traded currency, another factor may impact more: the Stock Exchange. Stock Exchanges have their own rules and markets. Smaller stock exchanges have less investors trading, less trading volumes, higher buy/sell spread. You may find yourself wanting to sell while none wants to buy, so you end up selling at a lower price than the market.

Anyway, for long term investors like us, these are just insignificant details. I picked one in USD, traded in London Stock Exchange. Actually JustETF is not up to date, since my Interactive Brokers app tells me that my Ticker is CSSPX.LSEETF and that’s not listed in the screenshot I showed to you.

Yes, since ETFs are becoming so popular, London Stock Exchange recently split and now we have LSE and LSEETF, just for trading ETFs!

That’s all my friends!