Index investing is growing in Europe, and for a good reason: we think it's the best way for most to grow their wealth. But beginning with investing in index funds is not a simple process.
This guide explains index investing for Europeans from A to Z. After explaining the benefits of index investing, we teach you how to build your portfolio of index funds. We will then show you three options for index investing:
- Through a broker, where you manage your own investments.
- Through an app like Curvo, where everything is simplified and managed for you.
- With a financial advisor, where you receive guidance but still manage your own investments.
What is index investing?
Index investing, also called passive investing, is a tried and tested method for growing your wealth. It’s based on the observation that rather than picking individual stocks and trying to buy and sell at the right time, it’s usually more profitable to invest in the stock market as a whole. Instead of finding the needle in the haystack, you buy the entire haystack.
When index investing, you invest in a type of fund called an index fund. Each index fund tracks a specific index, which is a collection of stocks with strict rules on which stocks are included and how much of each company the index contains. An index fund invests in the companies dictated by the rules of the index.
The most famous index is the S&P 500, which contains the 500 biggest American companies. Large companies such as Apple, Google or Amazon are represented in the S&P 500. The main index in Europe is the EURO STOXX 50, and the Belgian BEL 20 consists of the 20 largest companies in the country.
Ever since the first index fund was created in 1976, index investing has proven to be a great way to invest. By effectively becoming part owner of thousands of stocks across the world, index investing lets anyone earn a dividend off of the growth of the world economy.
The graph below shows the growth of the S&P 500 index since 1992. A €10,000 investment in 1992 would have resulted in over €220,000 by the end of 2022, or an average 10.6% return per year!
Why invest in index funds?
In the past, all investing was active. In active investing, you intentionally pick certain stocks to invest in. You hope that these stocks are undervalued when you buy them, and that you can sell them with a profit later.
Index investing takes the opposite approach. Rather than picking certain stocks that you think are going to be winners, you try to invest in all stocks at once. This way, you earn a return that corresponds to the average return of the whole stock market.
And it turns out that index investing almost always beats active investing. There are several reasons.
Stock picking is very hard
Some people manage their own portfolio of individual stocks. It's fun and exciting, it's easy to get started by installing any of the neo-broker apps, and you get to invest in the companies you love. But in all likelihood, your return will be inferior to a portfolio of index funds.
First of all, it is very time-consuming if you want to do it well. And you should if you're investing your life savings! You need to do the research to convince yourself that a particular stock is undervalued by the millions of investors around the world. You then need to decide when you will sell. It's best to decide this up-front to reduce the risk that you will make investment decisions based on your emotions. An investor's emotions are his worst enemy.
Also, when you buy a stock, you have to remember that there's another person on the other side of the transaction who's selling you their stock. Every transaction in the stock market is basically a trade in opposing views. This other person can be an individual investor like yourself. But only about 15% of trading happens by individual investors like you and I. So most likely, they're a professional at a hedge fund, a large bank or another financial institution. And there's a good chance that they have access to much better information than yourself that made them decide to sell the stock. Investing is their livelihood, and they have entire departments of analysts supporting him in his work. So from the moment you buy the stock, the odds of the bet turning in your favour are already against you.
Finally, only a relatively small number of stocks perform really well. Most stocks actually don't perform that well. And if you don't own the ones that do really well, you're much more likely to underperform the market. This skewness makes stock picking really hard.
The majority of active funds underperform index funds
If you don't want to pick your own stocks, you can invest in an active fund where professional fund managers do it for you. Most banks in Europe offer a variety of active funds. But it turns out that in most cases, you will earn a higher return through index investing than investing in an active fund.
First of all, active funds are very expensive. It requires fund managers, analysts and other specialists to do the research and make investment decisions. These people are very handsomely paid, which translates into much higher costs for the investors.
Let's take the active fund "KBC Equity Fund World" (identified by its ISIN code BE6213775529), offered by the large Belgian bank KBC. The managers of the fund try to beat the MSCI All Country World index, a global index of over 2,800 stocks from 47 countries. There's also an index fund that tracks the same index, namely "iShares MSCI ACWI" offered by BlackRock (ISIN IE00B6R52259).
When comparing the fees of the two funds, the difference is staggering. At 1.72%, the yearly fee for the active fund is more than eight times as much as the index fund, whose yearly fee is merely 0.20%. On top of that, the active fund charges an entry fee such that for every €100 you invest in the fund, €3 goes directly to the bank. Only €97 is effectively invested. With the index fund, the full €100 is invested.
Not only are active funds more expensive than index funds, but empirical data shows that index investing tends to outperform active management over the long term. The ESMA, the European regulator for the finance industry, found out that more than 75% of active funds underperform against their index benchmark. On top of that, the group of top 25% active funds changes constantly. There's a good chance that a top fund of the last 5 years won't be nearly as good over the next 5 years. So it's almost impossible for investors to consistently pick outperforming active funds.
Going back to the "KBC Equity Fund World" active fund, we can see in the graph below that it significantly underperforms against the equivalent index fund. Since 2005, the index fund has delivered an average return of 8.6% per year, whereas the active fund by KBC has returned 4.9%. This active fund is definitely part of the 75% identified by the ESMA that underperforms their benchmark.
If you had invested €10,000 in both funds in 2005, the index fund would have netted you €43,000. But the active fund by KBC would have earned you only €23,000. That's a difference of €20,000! Not only do investors in the active fund pay more, they also pay for inferior performance.
Why index investing is great for Europeans
There are several reasons why index investing is one of the best ways for Europeans to grow their wealth.
One of the problems associated with active investing are the high fees. Index investors pay lower fees because index funds are very cheap to run. It's simple to track an index: all that is required is buying the stocks in the index, and update when the index changes. It doesn't require expensive analysts or other specialists.
One of the goals of index investing is to diversify as much as possible. We saw that an index fund such as "iShares MSCI ACWI" invests in 2,800 companies across 47 countries. Through diversification across many countries and sectors, you eliminate unnecessary risk. And you also benefit from the growth of the best companies in the world, not just the large German, French or American companies you know. By investing in as many companies as possible, you're almost sure of including the winners, namely the minority of stocks that are responsible for most of the returns.
Rooted in the real economy
Most index funds invest either in stocks or bonds. Those are backed by real companies, with real factories, employees, intellectual property, and so on. This is unlike, for example, the crypto space, where the value of a currency or token is mostly determined by its potential rather than by concrete applications.
You can buy and sell whenever you want
Index funds are very easy to buy and sell. If you wish to, you can trade any index fund within minutes. In finance jargon, we say that index funds are "liquid". This is an advantage compared to other types of investments such as real estate or art. For instance, when selling a house, it can take a long time before finding the right buyer.
You can invest with low amounts
Another advantage of index investing is that you don't need a lot of capital to get started. You can even invest with as little as €50. This makes index investing possible for everyone, especially young people who just started their career and want to grow their wealth by putting their savings. In contrast, real estate is much less accessible. Just the down-payment for a property requires several tens of thousands of euros.
In most European countries, investing in the stock markets is tax-efficient compared to other types of investments. Some countries like Belgium even don't tax profits from investments in stocks, making index investing particularly tax-efficient for them.
Great for beginners
Index investing is one of the best ways for new investors to start investing. It's a proven strategy and doesn't take too much time to set up. Furthermore, it's a lot less risky than investing in individual stocks, or trading in highly leveraged instruments like options of CFDs.
Long-term index investing has worked in the past. And there's no reason it shouldn't work in the future. Just take the global index MSCI World as an example, which is composed of 1,500 companies across 23 countries. It has delivered an average yearly return of 10.6% since 1979.
The growth of passive investing
As investors increasingly recognize the benefits of index investing, the movement has grown considerably over the years. In 2008, ETFs (the major type of index fund) had less than a 3% market share. This has grown to 12% in 2022.
The risks of index investing
Every investment has risks, and index investing is no different.
The stock market goes down from time to time
It's no secret that the economy ebbs and flows. Because of these fluctuations, it's important to maintain a long-term view when investing. An investment horizon of 10 years or more is ideal.
Less control over what you invest in
When you invest in an index fund, you let the underlying index provider choose all the stocks in the index. For instance, when you invest in the S&P 500, you can't choose the companies you invest in because you have no say over the composition of the index. Only Standard & Poor's, the company behind the S&P 500, can.
This may be particularly worrisome for those who do not wish to invest in certain companies with poor ethical values or negative impacts on the environment. Fortunately, fund providers are increasingly creating funds that exclude companies they deem unethical or that do not meet sustainability criteria.
How does index investing work?
There are several steps to start index investing:
- Choose the indices. There are thousands of indices to choose from, though we think some are better than others.
- Build the right portfolio of indices for you. You need to select the right mix of indices that match you and your goals. There's no one-size-fits-all in investing!
- Choose the funds that track the indices. You can't buy an index directly. Instead, you invest in a fund that tracks a specific index. But for each index, there are several funds to choose from. We help you determine what to pay attention to when choosing a fund.
- Adopt a buy-and-hold strategy. A core tenet of index investing is to invest regularly, for instance every month when your salary comes in, and not sell until you need the proceeds from your investments.
Choose the indices
There are thousands of indices to choose from, and more are published every week. But we consider some indices better suited than others. What follows are the criteria used to build the portfolios offered through the Curvo app and that are managed by NNEK, a Dutch investment firm licensed by the Dutch regulator (AFM).
Stocks and bonds
There are indices for different types of assets: stocks, bonds, commodities, precious metals, crypto... We prefer stocks and bonds because they generate an income. Stocks pay out a dividend, and bonds pay an interest. On the other hand, a precious metal like gold does not generate any income. In fact, it actually costs money to store and a secure it.
Stocks and bonds have a different role in an investment portfolio. Stocks are the main drivers for returns, whereas bonds tame the fluctuations of your investments.
We also prefer more diverse indices because they eliminate unnecessary risks. That's why we favour a global index like MSCI World over one that focuses on a single country, like the S&P 500 or the BEL 20. Likewise, we prefer an index that invests in all sectors over the Nasdaq-100, which only contains technology companies.
A criteria that may be important for you is sustainability. By default, indices do not exclude companies based on ethical views. But there are variants that do. For example, the MSCI World ESG Screened index is a variant of the MSCI World index that excludes companies that could be considered controversial or that are not compliant with the United Nations Global Compact principles. These may be companies associated with civilian and nuclear weapons, tobacco, or those that derive revenues from thermal coal and oil sands extraction.
Examples of indices
The following indexes are a good starting point for European investors:
- MSCI World. A collection of over 1,500 companies across 23 "developed" markets: US, Germany, France, Japan...
- MSCI Emerging Markets. It's similar to the MSCI World index but for emerging markets like China or Brazil.
- FTSE EMU Government Bond. A collection of government bonds issues by countries in the European Monetary Union.
To compare the historical performance of indices, we recommend you use our free backtesting tool Backtest.
Build the right portfolio of indices for you
For most people, a single index is not enough to constitute a balanced portfolio that will bring them success over the long term. You must choose rhe right mix of indices to build a portfolio that fits you and your goals:
- What's your investment goal?
- How long are you investing for?
- What is your tolerance for risk?
- What is your capacity for taking risk?
If you choose to manage your own investments, you will have to answer these questions for yourself and build your portfolio accordingly. We realise that this can be a challenging task. So when investing through Curvo's app in one of NNEK's portfolios, we ask you these questions when you create your account. And based on your answers, the best portfolio is built for you.
Examples of portfolios
Let's look at a sample of portfolios.
- 100% stocks (88% MSCI World, 12% MSCI Emerging Markets). A mix of stocks from developed markets and emerging markets.
- Sustainable 100% stocks (100% MSCI World ESG Screened). A variant of the MSCI World index that excludes the most destructive companies.
- 60% stocks 40% bonds (53% MSCI World, 7% MSCI Emerging Markets, 40% FTSE EMU Government Bond). A portfolio that fluctuates less because of the bonds, and that may be better suited for you if you don't tolerate risk as much.
When building your own portfolio, you may use the portfolios as inspiration that are offered through the Curvo app and managed by NNEK. Our free backtesting tool Backtest can also be useful to help you understand your portfolio.
Choose the funds that track the indices
By now, we chose the indices we want to invest in, and we constructed the right mix of indices that suits us and our goals. Unfortunately, we can't directly invest in an index. Instead, we must select the funds that tracks each of the indices in our portfolio. In Europe, this is most commonly done through a type of fund called an ETF, or "exchange-traded fund".
The difference between an index fund and an ETF
Fundamentally, there's very little difference between an index fund and an ETF. Both track an index and have a similar cost. The main difference is that you need to buy an ETF on a stock exchange, whereas index funds can be purchased directly from the fund provider. To access a stock exchange, you need to go through a middleman called a broker. We explain this in more detail later.
Finding ETFs with justETF.com
justETF.com is a large, searchable database of ETFs available in Europe. For instance, you can use it to find all the ETFs that track a certain index. In the screenshot below, we found the ETFs that track the MSCI World index (IWDA is such a popular ETF).
Choosing the right ETF
There are several things to look out for when choosing a good ETF that tracks an index:
- Distribution of dividends. Accumulating funds automatically reinvest dividends, whereas distributing funds pay them out to you. In some countries like Belgium, dividends are taxed at 30%. So accumulating funds are preferred.
- Domicile. Funds domiciled in Ireland or Luxembourg are more tax-advantageous because these countries have special tax treaties with the US.
- Currency. If you buy a fund that is not traded in euro, the broker will likely convert it for you. This comes at an additional cost.
- Size of the fund. Larger funds are less likely to shut down than smaller funds. You won't lose your investment when a fund closes, but you will have to find an alternative for your portfolio.
- Replication strategy. We prefer funds that physically replicate their index over synthetic funds because there is a counter-party risk for the latter.
- Cost of the fund. We prefer funds that have cheaper ongoing costs!
- Transaction tax (for Belgians). Depending on the characteristics of the ETF, the Belgian transaction tax varies between 0.12% and 1.32%. Of course, the lower the better.
Adopt a buy-and-hold strategy
Lastly, index investing works best when paired with a buy-and-hold strategy. In this strategy, you hold your investments, regardless of market fluctuations, until you reach your goal. For many, this would be at retirement.
The buy-and-hold strategy works because it gives the opportunity to compounding to work its magic. Exponential growth, which is how the stock market grows, becomes really visible in the long term.
On top of that, the strategy is much better for your mental well-being. Active investors constantly need to monitor their investments and assess if they need to buy or sell a particular stock. This has the danger of bringing a whole range of negative emotions onto oneself: anxiety, stress, regret... In contrast, the index investor who has adopted a buy-and-hold strategy is not concerned with short-term fluctuations in prices and so remains undisturbed.
Index investing in practice
In Europe, there are three ways to do index investing:
- Through a broker. A broker is a middleman that gives you access to the stock markets and allows you to buy and sell ETFs. It gives you the most flexibility because you're in control of what you buy. But it also means you're fully responsible for the management of your investments.
- With Curvo. The goal of Curvo is to address the challenges of managing your own investments through a broker. NNEK (the investment firm with whom Curvo partnered and who manages the portfolios) does all the work so you don't have to worry.
- With a financial advisor, where you receive guidance but still manage your investments.
Index investing with a broker: manage your own investments
The first option is to be responsible for your own investments and manage them through a broker. The broker is the middleman between you and the stock exchange, where you can buy and sell the ETFs that track the indices in your portfolio. The steps are:
- Choose a broker.
- Buy the ETFs in your portfolio.
- Repeat every month (also called dollar-cost averaging)
Choose a broker
There are many brokers you can choose from. They differ on:
- Their fees, as some are cheaper than others.
- How they handle taxes. In general, domestic brokers take care of declaring and paying all taxes you owe. Foreign brokers tend to shift the responsibility (and fiscal risk!) to you.
- The ease of setting up an account. Some provide streamlined apps, whereas others only offer a clunky web application.
- Safety. Some brokers have had issues with the regulators.
For Belgians, we refer to our guide to brokers for a comparison of the different brokers available.
Buy the ETFs in your portfolio
Once you select a broker and open an account, you can purchase the ETFs in your portfolio. The specifics depend on your broker and country of residence. Learn more in our country-specific guides: for Belgium, France or the Netherlands.
Repeat every month
Index investing works best when adopting a buy-and-hold strategy. But when should you buy? Every year? Every three years? Every month?
We think that your investments should follow the rhythm of your income. If you're paid monthly, then invest monthly. If you're a freelancer and you get paid about every quarter, then make a purchase every quarter. This process of buying at fixed times is called dollar-cost averaging (commonly abbreviated by DCA), or euro-cost averaging in Europe.
There are several reasons why dollar-cost averaging is a great strategy for most investors:
- You don't miss out on returns, because you invest regardless of how the markets are doing.
- You're not tempted to time the market. Timing the market is notoriously difficult, and more often leads to a bad outcome instead of a good one.
- It avoids regret. In many cases, timing the market leads to regret ("I should have bought then!"). By adopting a system like dollar-cost averaging and sticking to it, you avoid such negative emotions.
The difficulties of investing through a broker
It has a steep learning curve
Managing your own portfolio of ETFs through a broker can be challenging. You need to choose the indices, build your portfolio as the right mix of indices that suit you and your goals, and choose the ETFs that track these indices. For each step, there are thousands of options. But that's not all. Understanding the tax system is also important, as well as learning how to use your broker, or knowing when to rebalance your portfolio.
You may not have the time, motivation, or simply interest in finance to climb over the learning curve. Or you'd rather spend time on things more important to you than the management of your investments.
It takes time to execute
If you invest every month, you need to send money to your brokerage account, calculate how many shares of each ETF to buy, send through the orders, and track the evolution of your portfolio. From our own experience, this process is fun the first few months when everything is new, but it becomes a drag afterwards.
Costly for monthly investing
It makes sense for most to invest monthly because it follows the rhythm of your income, and you buy irrespective of the markets being low or high. But the business model of brokers is not adapted because they charge a fee per transaction. When investing a smaller amount every month, the fee can be prohibitively expensive and have too great of a negative impact on your return. Having more funds in your portfolio only worsens the problem.
It requires discipline
It's one thing to set up your portfolio and make your first purchases. It's another to maintain the habit over years, especially when markets are down. This requires a necessary discipline if you want to ensure success in the long term.
Brokers want you to trade
Brokers earn money per trade. They earn a lot more from customers who trade often. So as an index investor with a buy-and-hold strategy, you're a bad customer for them. Their incentives are conflicting with yours. And the apps of many brokers are indeed set up to incentivise trading. For example, they show the biggest moving stocks of the last 24 hours on the home screen, hoping that you'll buy the hot stock that went up a lot. Obviously, this is a terrible reason to invest in a stock.
Let's look at how the next option, index investing through Curvo's app in a portfolio managed by NNEK, addresses the issues of investing through a broker.
Curvo: the work is done for you
We created Curvo to address the challenges of investing through a broker. We started investing through a broker ourselves. Our founder Yoran spent hours researching and figuring out how to build an optimal portfolio to prepare for his financial future. He read books, scoured the web and got lost on Reddit. Finding the right resources was challenging.
From this experience, he realised why none of his friends were setting up their own investments through a broker: it's too complicated. At the same time, we've seen that index investing is such a powerful tool to grow our wealth. So it made sense to build something to solve this problem. Enter Curvo.
Diversified portfolio built for you
We understand that it's hard to build the portfolio that's right for you, so creating an account starts with answering a questionnaire on your investment goals and your appetite for risk. You’ll then be assigned the best portfolio of index funds that matches your goals and risk tolerance. Each portfolio is managed by NNEK, a Dutch investment firm licensed by the Dutch regulator (AFM). They're all globally diversified and invest in over 7,500 companies.
Sustainability at the core
The investment portfolios focus on one guiding principle: don’t invest in companies that are considered destructive to the planet. This means that sectors like non-renewable energy, vice products, weapons and controversial companies are excluded.
Built for monthly investing
You can set up a monthly savings plan where your selected amount is automatically debited from your bank account and invested in your portfolio at the start of each month. This way, it's easy to adopt the best saving habits. Also, Curvo does not charge any transaction fees (although a management fee is due to NNEK). Lastly, it supports fractional shares, meaning all your money is invested. So Curvo is ideal for monthly investing.
No learning curve
Our goal is to solve all the complexities of index investing through a broker. This means you don't have to worry about:
- Understanding the tax system. The portfolios are already tax-optimised.
- Choosing a broker. There are many options available and it can be hard to pick the one that you feel most comfortable with.
- Rebalancing. It is made sure that your portfolio is kept in balance.
- Calculating and executing your orders every month. It's all set up for you.
- Keeping discipline. We help you stay the course!
Find out how Curvo works.
The downside of Curvo
It offers many benefits compared to a broker. Your investments come with an all-in fee per year which starts from 0.6%. This may be more expensive than managing your own investments through a broker, depending on your broker and how frequently your invest.
Let us look at the last option for index investing in Europe: with the help of a financial advisor.
Index investing with a financial advisor
This model is a hybrid: you manage your own investments with a broker, but you are assisted by a financial advisor. Although a financial advisor is legally not allowed to execute the orders for you, they can advise you on the best portfolio for you, and show you the ropes of using your broker.
Furthermore, a financial advisor can advise you on more than just investing. For instance, they can help you with fiscal questions, financial planning, or broader estate planning.
Most advisors work with a fixed fee that is usually going to be at least several hundred euros. After all, any financial advisor will need to spend sufficient time to properly advise you. That's why a financial advisor only makes sense if you have a sufficient amount to invest.
Furthermore, you need to be careful in choosing your financial advisor. You need to ensure that their advice is in your best interest, not in their own or their employer's interest.
Comparing the three ways for index investing in Europe
The table below compares the three index investing methods we discussed prior.
Questions you may have
Why should I invest my savings?
We think that investing is an important tool to ensure the financial future of Europeans, especially the younger generation. The interest rates have been low for several years, meaning a savings account hardly yields any interest. On top of that, inflation has been higher than the interest rates. So we actually lose money when leaving our savings in a savings account. And the future of our generation is uncertain because of impact of the changing demographics on our pension system.
Investing is a way to take our financial future into our own hands. And we are convinced that index investing is the best way to invest.
How do beginners invest in index funds?
We built Curvo as the most beginner-friendly way to invest in index funds. So there's a good chance that Curvo will suit your needs. Note that Curvo is available only to Belgians as of now. But even if you don't live in Belgium, you can download the app and leave your email. We will notify you when we launch in your country.
But if you have the motivation, interest and time to go through the learning curve of managing your own investments, opening an account with a broker is the way to go. Feel free to use our resources for DIY investors to help you on your investment journey.
How much money do I need to start index investing?
Not much. Investing through Curvo's app starts from €50, and you can buy shares of ETFs like VWCE or IWDA for less than €100.
What are the best index funds for Belgians?
Good question! Unfortunately, there's no straight answer because it depends on you and your goals. We suggest you go through our list of best ETFs for Belgians.
What is the average return of an index fund?
A global index such as the MSCI World has returned an average 10.9% since 1979.
I want to start investing but I'm not sure how much
This is an important question that does not get enough attention. Most resources focus only on the mechanics of investing (such as this article!) and leave this question unanswered.
There's a four-step process to determine how much you can invest every month:
- Determine your income
- Estimate your expenses
- Calculate the value of your emergency fund
- Calculate how much is safe to invest every month
We explain further in our guide for determining your savings rate.
What you should do now
First, look at your existing investments, for instance funds that you have at a bank, or individual stocks that you own. What has been the return over the past few years? How does that compare to the return of a global index such as MSCI World?
Then decide which of the three ways for index investing suits you best:
- Broker. You're in full control. You're also left on your own though, and it's the option that requires the most amount of time, financial expertise and discipline.
- Curvo. All the complexities of index investing are taken care of so you don't have to worry. We started investing through a broker so we know where the challenges are and have built a tool that overcomes them.
- Financial advisor. A hybrid with the advantage that a financial advisor can give you advice even on things unrelated to investing, such as tax optimisation or life planning. However, it can be prohibitively expensive if you don't have large amounts to invest.