How to invest in ETFs in Belgium

What are ETFs

ETFs (Exchange-Traded Funds) are investment funds. They invest in hundreds, or even thousands, of stocks, bonds, or other types of investments. This diversification is a big benefit of ETFs. It makes them more attractive than an individual stock. Instead of investing in one company, you invest in an entire market through an index. For example, you can invest in a BEL 20 ETF and benefit from the performance of all the largest Belgian stocks.

Because the majority of ETFs are designed to track a market index, they're also called trackers. The style of investing based on indexes is called index investing, also called passive investing because you typically hold your investments over the long-term. When passively investing, you choose to ignore day-to-day price changes knowing that the market will keep growing long-term. Data shows that this strategy gives the highest return in most cases.

Why invest in ETFs

ETFs are the best investment for most people because of a few reasons:

• Best suited for the long-term: investing in ETFs compound to substantial returns over time. And it beats the active funds sold by your bank!
• Diversification: you’re exposed to thousands of companies in one go through a single fund. And diversification is key to good investing.
• Simplicity: once you’ve selected the right funds to invest in, you can sit back and watch your investments grow. There's no need to waste time analysing individual stocks.
• Cheap: partly due to the economies of scale and lack of active management costs, ETFs are a cheap way of investing.

Great. But how do you know which ETF to choose?

How to choose the right ETF

There are a few things to look out for when selecting an ETF.

Investment style

Most ETFs are passive, meaning they track an index. But more and more active ETFs are appearing. But, these funds are more expensive. They often yield lower returns than an index-based ETF.

Type of asset

When choosing your ETF, you need to pick the right asset class: stocks, bonds, or other type of investment. Each has a role in a portfolio. Stocks represent ownership in a company. They offer the potential for higher returns over time, but with more volatility and risk. Bonds are different. They are loans to corporations or governments. They provide predictable income through interest, which makes them less risky than stocks.

You will most likely want a portfolio that contains both stocks and bonds. The reason is that you want the risk of the portfolio to match your goals. That includes your appetite for risk and your capacity for risk. Also, as you get older and near your financial goal, you will want to reduce the risk of your portfolio.

Your portfolio's composition is important. It's key when starting to invest. When you sign up to Curvo, you are asked a few questions on your goals and risk tolerance. You are then assigned the best portfolio for you, based on your answers.

Distribution of dividends

Any Belgian that perceives a dividend has to pay a 30% tax on it. Distributing funds distribute their dividends, which means they're taxable. But, accumulating funds reinvest the dividends into the fund before you ever receive them. This means you don't pay the dividend tax.

Furthermore, accumulating ETFs are more in line with a passive approach. By automatically reinvesting the dividends, you leverage compounding.

That's why you should invest only in accumulating funds, unless you have a good reason not to.

Domicile

Luxembourg and Ireland have special tax treaties with the US. These treaties make it attractive to set up funds there. As a Belgian investor, you can benefit from this. You can do so by investing in funds domiciled in one of these two countries. You can tell the country of domicile from the ISIN code of the ETF. The ISINs of funds domiciled in Ireland start with "IE", those from Luxembourg start with "LU".

Further below, we'll show you how you can buy your first shares of the ETF Vanguard FTSE All-World. Its ISIN code is IE00BK5BQT80, meaning that it's domiciled in Ireland (which is what we want).

Currency

If you buy a fund that is not traded in Euro, the broker will likely convert it for you. But this a source of revenue for brokers, so it often comes at an extra cost for you. For this reason, it's best to invest in funds that are trading in Euro.

Size

You want an investment that is viable for the long run. So, you want to avoid an ETF shutting down soon after your investment. As ETFs must reach a certain size to become viable, a larger fund is less likely to shut down. Also, larger funds are easier to buy and sell because there are more players in the market. The spread between the buy and sale price is smaller. A good rule is to only consider ETFs with at least €100 million.

If an ETF is liquidated, you do not lose your money, which is an important thing to note. In fact, the ETF's assets are still worth their market value. So, you’ll receive that value when they sell them.

Replication

Invest in funds that physically replicate their index. Some ETFs are cheaper through a technique called synthetic replication. The fund provider does not buy the index's companies' shares. Instead, they use financial engineering to replicate the index's returns. They do this by making a deal with a third-party, most often a large bank. It sounds a bit dodgy, and we think so too. The main issue with synthetic replication is that it adds risk coming from the counterparty. And when investing our life savings, we want to limit the risks that are avoidable. Avoid!

This is why all the portfolios offered through the Curvo app use only physically replicated funds.

Cost

Fund managers charge a fee for managing their funds. The total expense ratio (TER) indicates the total cost of a fund. They deduct it from the fund's performance. So, when you look at a fund's performance, it is usually net of fees.

The advantage of an ETF over active funds is that costs are usually very low. For instance, VWCE has a total expense ratio of 0.22%. In contrast, this active fund from BNP Paribas Fortis costs 1.95%. Active funds usually also have entry fees, which ETFs don't have.

Transaction tax (TOB)

In Belgium, there’s a tax on transactions ("beurstaks" or "taxe sur les opérations de bourse" or TOB). You pay it every time you buy or sell a security. For ETFs, the tax rate varies between 0.12% and 1.32% of the transaction amount. We prefer ETFs with a 0.12% tax rate that are registered in the EU but not in Belgium. ETF registered in Belgium have a higher 1.32% tax rate (we know, it's weird).

Finding ETFs with justETF

justETF.com is the best resource that we know to compare ETFs. It shows the ETF characteristics we mentioned for thousands of ETFs available to Europeans. Below is what it shows for VWCE (the red highlights are by us):

How to invest in ETFs in Belgium

For Belgians, there are two ways of buying ETFs:

1. Through a broker, where you manage your own portfolio of ETFs
2. Through an app like Curvo, which takes care of the difficulties of investing by yourself

Let's discover both options.

Option 1: investing in ETFs through a broker

To show you how it works, we'll show how to buy the VWCE ETF with DEGIRO.

The DEGIRO broker

Investors trade ETFs on stock exchanges. The most famous stock exchanges are the New York Stock Exchange (NYSE) and Nasdaq. There is also the London Stock Exchange (LSE). But, in Europe, it's better to buy ETFs on European exchanges. For example, Euronext Amsterdam or XETRA.

To access a stock exchange, you have to go through an intermediate called a broker. There are several brokers Belgians can choose from, each with their pros and cons. In this example, we selected DEGIRO for its low fees and wide range of free ETFs.

The first step is to open an account with DEGIRO. Unfortunately, degiro.be does not exist. So, you'll have to open an account with either degiro.nl (Dutch) or degiro.fr (French). This is confusing! Once you open the account, you can deposit cash. This can take a couple of days to arrive, depending on your bank.

The VWCE ETF

To show you how to buy an ETF, we are going to assume that we wish to buy the VWCE ETF. VWCE is the ticker symbol for "Vanguard FTSE All-World Accumulation" (ISIN: IE00BK5BQT80). It is one of the most popular ETFs for Belgians. It's accumulating, domiciled in Ireland, trades in euro, and is physically replicated.

VWCE tracks the FTSE All-World index. One main benefit is that it's very diversified. It invests in over 4,000 companies from more than 40 countries. These are big and mid-sized companies in "developed" markets like the US, Germany, UK, and Japan. They are also from emerging markets like Brazil, China, and Chile. So VWCE is an investment in a big chunk of the world economy.

The ETF's average return per year has been 8.7% since 2005. This is based on the historical performance of the FTSE All-World index.

Buying VWCE on DEGIRO

Once the deposit has arrived, you can buy the ETF. Search for VWCE by typing its ISIN code "IE00BK5BQT80" in the search bar. The second confusion is that you'll see several results. They all correspond to the same ETF, but on different exchanges. For instance, Vanguard trades on XETRA, Tradegate Exchange, Borsa Italiana... To pay the lowest fees, it's important with DEGIRO to buy VWCE on XETRA ("XET").

Now we can buy VWCE. Select the number of shares you wish to buy. Note that you can only buy whole units of shares. So you'll need to calculate how many shares you can buy. This depends on how much you want to invest and the amount you deposited in your DEGIRO account.

You also need to choose the type of order. The most common types are market orders and limit orders. A market order is an order to buy immediately at the best available current price. It prioritizes speed over price. It fills if there are enough sellers. After all, remember that you're buying the ETF off of someone who wishes to sell his. Market prices change. So, the final price may differ from the order price.

A limit order is an order to buy at a specific price or better. You can set a price for the transaction. It gives you more control. Unlike market orders, limit orders may not execute immediately or at all. They depend on the share price reaching the specified price.

Once you’re ready, click “Place order”. Congrats, you just bought your first ETF!

Considerations when investing through DEGIRO

First of all, the interface of their app is intimidating to use if you're new to investing. As you can tell, there's a lot going on on each screen. DEGIRO offers many types of securities: turbos, warrants, stocks, ETFs. When you place an order, you also have to choose a market order, a limit order, a stop-loss order, and others. All this technical terminology means that you need to know what you're doing.

Also, DEGIRO has had a few problems with the Dutch financial authorities (AFM) over the years. This doesn't inspire confidence. Lastly, they're a foreign broker. This means you have to declare your DEGIRO account to the Belgian National Bank as well as on your yearly tax form. You can read more on DEGIRO in our review.

Fortunately, there are many different brokers available in Belgium. We put together a resource that highlights the best brokers for Belgian investors.

The costs of investing through a broker

There are a fees when investing in an ETF through a broker:

• Total expense ratio (TER) of the ETF. Fund providers charge this fee for managing their fund. For example, VWCE costs 0.22% per year on the total invested. They deduct it from the performance of the fund. You can find the TER by searching through the "Key Investor Document" (KID) as many brokers do not list the fee. The website justETF.com also shows the total expense ratio of any ETF.
• ‍Broker fee. There is (usually) a fee every time you buy or sell an ETF. This is dependent on the broker. Through DEGIRO, we did not have to pay a transaction fee. This is because VWCE is in their free selection of ETFs. We do have to buy it on the XETRA exchange. But they do charge a yearly connectivity cost of €2.50.
• Transaction tax (TOB). The tax you must pay to the Belgian state when buying or selling a financial asset. Calculating the tax rate is complex. It depends on the ETF's different characteristics. For our buy of VWCE, we had to pay 0.12% of what we invested.

The (easier) option 2: investing through an app like Curvo

Buying a single ETF is probably not the end. It's a small part of building a portfolio that will bring you long-term success. Defining the right portfolio is the most important task for every investor. But, it is also the most difficult. The composition of your portfolio depends on your goals, risk appetite, age, and income.

We understand this challenge. It's one of many subtleties investors must navigate to succeed long term. We built Curvo to take away all the complexities of good index investing.

When you sign up, you are asked questions to learn about your goals and appetite for risk. You are then matched with the best portfolio for you. No need to search through thousands of ETFs or scour wikis to understand how to select a fund.

You can then start investing, from €50. Or you can choose to set up a savings plan, where you invest an amount of your choice every month. Saving becomes easy when it's automated!

Learn more about how Curvo helps you invest the right way.

Summary

We’ve shown you two ways of investing in ETFs. First through a broker, where you manage your own portfolio of ETFs. It gives you the most control. But, the big downside is the difficulty of always making the right choices. As we’ve shown, there are tons of ETFs available. It's challenging to choose the ones that match your goals. You must also be careful to not pick the wrong ones, where you could end up paying high fees and taxes. You can avoid these mistakes with an app like Curvo. It takes care of the complexities of good investing for you and sets you up for long-term success.

What you should do now

The first step is to decide if you want to manage your portfolio of ETFs yourself, or invest through an app like Curvo. There are pros and cons to each option. Our comparison can help you choose.

Want to use a broker?

We have you covered! In that case, we recommend you use these resources to learn about investing in ETFs:

• Build the portfolio that's right for you.
• Choose the best ETFs to set up the portfolio.
• Select the best broker for you.
• Set up monthly investing, which is one of the best financial habits you can adopt.
• Learn about Belgian taxes when investing.

Or interested in Curvo?

Learn how it works and how it can help you grow your long-term wealth through good investing.

"De hangmatbelegger", the book on ETF investing for Belgians

If you want to dive deeper, we recommend you read "De hangmatbelegger". Curvo founder Yoran and Tim Nijsmans wrote it. It is the best beginner's guide to ETF investing for Belgians. Learn more on the "De hangmatbelegger" website.

Questions you may have

Is it wise to invest in ETFs?

Yes, ETFs can be a smart investment. This is due to their diversification, low cost, and ease of use. ETFs are passively managed funds. They follow a broad market index. They offer an efficient way to invest in a diverse set of securities. Still, consider your investment goals, risk tolerance, and strategy. Use them to pick the right ETFs for your portfolio.

Which ETF to buy as a beginner?

As a beginning investor, there are excellent ETFs that offer global diversification. For instance, the Vanguard FTSE All-World ETF (VWCE) invests in over 4,000 companies across the world. Or the SPDR MSCI ACWI IMI (IE00B3YLTY66) is a similar ETF.

What's the point of investing in an ETF?

ETFs offer many investment choices. They let you diversify your holdings. You can access a diverse portfolio. It includes either domestic or international securities. They represent a specific market, industry sector, or investment strategy. Unlike traditional funds, ETFs trade continuously. You can buy or sell them at any time.

Also, ETFs have lower fees than traditional active funds sold by your bank. This results in greater investment returns.