Investing in ETFs has grown in popularity over the last few years. Thanks in large part to their simplicity, they continue to provide value for French investors as a great way to invest in the stock market. But starting to invest in ETFs can be intimidating, especially when you're new to the world of investing. What follows is a guide for French investors to buy their first ETF.
What's an ETF?
An ETF (or exchange-traded fund) is a collection of tens, hundreds, or sometimes thousands of stocks or bonds. This spreading is one of the most attractive aspects of owning an ETF compared to individual stocks and bonds. By investing in a single ETF, you become part owner of thousands of companies in one go. The majority of ETFs are designed to track a market index, which is why they're sometimes called "trackers".
Many French people are familiar with the CAC-40, which is an index that covers the 40 largest companies on Euronext Paris, the main French stock exchange. Another one is the S&P 500 which tracks the top 500 largest companies in the United States, or the Nasdaq-100 that covers the top 100 American technology companies.
The style of investing through indexes is called passive investing: you’re specifically looking to hold your investments over the long-term and you’re diversified in one go. It’s the opposite of active investing where you’re following specific stocks and trying to buy low whilst selling high. And the data shows that passive investing works.
Why ETFs make sense
Investing in index funds is a lot easier than buying stocks that you have to analyse one by one. Here are a few reasons why you should consider investing in ETFs:
- Built for the long-term. Globally diversified ETFs perform well over the long run. The stock market has, historically and repeatedly, performed well, considering all the economic crises as well as World Wars.
- Diversification at the core. By buying an ETF, you’re exposed to thousands of companies in one go. Diversifying is key to good investing because it reduces the risk of a bad outcome.
- Simple to get started. It’s not difficult to build a balanced and diversified portfolio of ETFs and you can start investing from a low amount.
- Cheap. One of the main reasons that ETFs have become so popular is that they have low fees compared to actively managed funds.
You're convinced of the value of ETFs, but how do you know which one to choose?
How do you choose an ETF
There are several criteria to look out for when choosing an ETF to invest in.
Accumulating vs distributing
Accumulating funds directly reinvest the dividends which increases the value of your shares. On the other hand, distributing funds pay out a monthly, quarterly or annual dividend, and the money lands in your bank account.
If you’re young, it’s usually better to invest in an accumulating fund. You're likely still in the phase of your life where you want to grow your wealth. With accumulating funds, you won't worry about reinvesting the dividends as it's done for you and you can optimally benefit from the effect of compound interest.
Whichever option you go for, in France you’ll have to pay a 30% tax on the capital gains when you sell your investments.
If you buy a fund that is not traded in euro (€), the broker will likely convert it for you. However, the broker sees this as another source of revenue so it often comes at an additional cost. For this reason, it's best to invest in funds that are trading in euro.
The business model of ETF providers is based on economies of scale. Larger ETFs that attract many investors are financially more profitable for the fund provider. In fact, ETFs are more likely to be shut down after some time if they fail to receive sufficient investments. So as a long-term investor, it's preferable to invest in larger ETFs and avoid having to replace a fund in our portfolio after some time.
Some ETFs are cheaper through a technique called synthetic replication. Instead of actually buying the shares of the companies in the index, the fund provider uses financial engineering to replicate the returns of the index through a deal with a third party (typically a large bank). It sounds a bit dodgy, and we think so too. The main issue with synthetic replication is that it introduces an additional risk coming from the counterparty. And when investing our life savings, we want to limit the risks that are avoidable. So we choose to avoid synthetically replicated funds. Instead, invest in funds that physically replicate the underlying index.
Fund providers charge a fee for managing their funds, called the total expense ratio (TER). They automatically deduct it from the performance of the fund. You can find the TER on the fund's website or in the “Key Investor Information Document” (KIID). Naturally the lower the better!
ETFs are purchased through a middleman known as a broker, such as DEGIRO, Fortuneo, Boursorama or others. As such, broker fees are also involved which you have to pay every time you buy or sell an ETF.
Finally, to reduce the tax burden, it's good to invest in ETFs through a PEA or an assurance-vie. We explain that in more detail below.
How to do your research: justETF
justETF.com is the best resource that we know to compare ETFs. It shows most of the information that we mentioned in this article for thousands of ETFs available for French investors.
Below is what it shows for IWDA, a popular ETF we will look to buy down below (the red highlights are by us):
PEA vs assurance-vie vs compte-titres
Choosing the right tax wrapper for your investments is important. We’re fortunate that in France there are a couple of options that provide a tax benefit. But each has some restrictions too. Let’s dig into the available options and find out which is most appropriate for you.
The PEA (Plan d’Epargne en Actions) is a French regulated investment plan. Some insights:
- You’re limited to one plan.
- Contributions are capped at €150,000.
- Taxation is applied only once the funds have been withdrawn. What’s great with the PEA is that if you hold your investments for longer than 5 years, the capital gains and income earned are tax-free. This way, you save 12.8%. However, you still need to pay the social security contributions of 17.2%. This is still better than paying the full 30% without a PEA!
- Withdrawal penalty. You lose the tax advantage if you withdraw your investments before five years.
- Limited in the choice of investment. For ETFs to be eligible for the PEA, they need to invest in at least 75% in companies registered within the European Union. This means there aren’t as many ETFs available when investing through a PEA. There are ways to bypass the geographical constraints, for instance through synthetic replication. But as we’ve seen above, it’s a technique we think should be avoided as it’s an additional risk for your life savings.
Do note that it’s best to avoid taking out a PEA plan with your bank. They charge large fees for the service so it’s best to set one up yourself through an online broker. Although the fees are often higher than investing yourself through a compte-titres, you do benefit from the tax break.
For a PEA, you’ll have to cover the following fees:
- Transaction fees: the fee that the broker or bank charges when you buy or sell an ETF.
- Custody fee: you’ll have to pay this once a year.
- Opening an account: the fee you pay to open a PEA legally cannot exceed €10.
- Management fees: if you delegate the management of your investments to a bank or investment firm, you may have to pay additional fees.
Assurance-vie plans are popular in France and they cover a lot more than just an insurance in case you pass away. There are many different types of assurance-vie plans available for French investors:
- Euro funds. This form of guaranteed capital pays little, but is safe. A euro fund is basically a very low-risk government or corporate bond that guarantees capital in exchange for a small return. It’s popular as your funds are guaranteed up to a maximum of €70,000, covered by the Fonds de garantie des assurances de personnes (FGAP).
- SCPI. The acronym stands for Sociétés Civiles de Placement Immobilier, which are companies that will buy properties to rent out and pay dividends to investors based on the rents received. It’s a good way to invest in real-estate. However, because it is limited to real-estate, you don't get the diversification benefits that ETFs offer.
- ETFs. As we’ve seen above, it’s one of the best ways to invest passively for your future.
- Individual stocks and bonds. You can invest in so-called “live securities” for an assurance-vie. Basically, you’re buying shares and bonds. The transaction fees that providers charge are quite significant too.
- UCITS / SICAV: known in France as OPCVM (organisme de placement collectif en valeurs mobilières) are funds that buy shares or bonds and manage the allocation of the funds themselves. It is an intermediary between the financial markets and individuals such as yourself and in general, these funds are actively managed which is something we wish to avoid.
What we’re interested in though are the ETF investments. You’ll have to set up your assurance-vie plan and after signing a contract, you’ll be able to send money to your account. You can then choose to buy some ETFs.
So what’s the taxation incentive?
As with the PEA, there is a tax incentive for holding an assurance-vie for longer periods of time. When your life insurance is at least 8 years old and the value is less than €150,000, you are exempt from tax on gains of less than €4,600. This means that you will only pay social security charges of 17.2%, instead of the full 30% tax rate. Beyond €4,600, gains are taxed at 24.7%.
There is no tax advantage if your assurance-vie is worth more than €150,000.
As it’s an assurance-vie, what are the guarantees for your loved ones if you pass away?
If you pass away before you turn 70 years old, the sums that you deposited are exempt from inheritance tax up to €152,500, and with a flat rate of 20% up to €700,000. The rate becomes 31.25% above this amount.
The costs of an assurance vie
For an assurance-vie, you’ll have to cover the following fees:
- Transaction fees, or the cost to buy or sell an investment. Assurance-vie providers also charge fees for every contribution you make.
- Custody fee: you’ll have to pay this once a year.
- Management fees: if you choose a delegated management of your investments, you may have to pay additional fees.
Pros and cons
The assurance-vie has a few advantages compared to a PEA:
- Tax incentive: the fiscal advantages are not negligible if you hold on to your plan for more than 8 years.
- No limits: you can save as you much as you like through an assurance-vie plan.
But it also has downsides:
- Costs: you’ll be charged fees across the board, which compound over time and eat into your nest egg.
- Limited choice: the assurance-vie provider may not offer the ETFs that you want for your portfolio.
The most flexible option for French investors is a compte-titres, also known as a CTO or "compte-titres ordinaire". It allows you the freedom to choose and buy any ETF that you wish.
- Freedom to invest anywhere: there are no limits or restrictions as to where you can invest your money.
- Any type of ETF, which means you can also buy bond ETFs.
- No tax incentive. Instead of saving 12.8% through a PEA, you’ll have to pay the full 30% on any capital gains you make.
- You can have as many accounts as you like. There are no limits to the amount of funds that you can have in your account.
Thanks to the flexibility and simplicity of a compte-titres, we’re going to focus the rest of the guide on how to buy an ETF from this perspective.
How to invest in an ETF from France through a compte-titres
There are two ways to do so and for this:
- Managing your own investments through a broker
- Using an investment app like Curvo
Option 1: investing in ETFs through a broker
IWDA as an example
To show you how to buy an ETF, we are going to assume that we wish to buy the IWDA ETF. IWDA is the ticker symbol for "iShares Core MSCI World UCITS ETF (Acc)" (ISIN: IE00B4L5Y983), one of the most popular ETFs for French investors and that satisfies all the criteria above that we’re looking for in an ETF.
IWDA tracks the MSCI World index, an index that consists of about 1,500 stocks from 23 countries that economists qualify as "developed": United States, Germany, Japan, United Kingdom, Australia… Investing in IWDA means investing in a wide segment of the global economy.
The returns of IWDA have been excellent throughout the years. An analysis on Backtest shows that it has returned an average 10.7% since 1979. If you had invested €10,000 in 1979, you would have had around €850,000 today!
Buying IWDA through Trade Republic
There are a variety of brokers available for us as French investors. The popular German neo-broker Trade Republic continues to grow in popularity. They do not offer PEA or assurance-vie plans but you are able to purchase ETFs easily in a compte-titres.
Once you’ve registered for an account, you’ll have a small questionnaire with three questions to run through before your account can be opened. Upon the approval of your account, you’ll be able to buy and sell any stock or ETF available in the app. As Trade Republic offers fractional shares, you can buy parts of a share. This is particularly helpful for you if you wish to invest monthly.
ETFs are traded on stock exchanges. Famous stock exchanges are the New York Stock Exchange (NYSE), Nasdaq, or the London Stock Exchange (LSE). Trade Republic offers around 2,000 ETFs for you to choose from. However you can only purchase your ETFs on Trade Republic through the Hamburg Stock Exchange (HAM) as they have a special brokerage deal with them.
To find your ETF, start by clicking on the magnifying glass at the bottom of the app and type in “IWDA”. You’ll then see “Stocks” and “ETFs” pop up below. You’ll find that the “Core MSCI World USD (Acc)” is what we’re looking for.
Once you’re ready, select the order type. Beware that there are different options such as "Limit" or "Stop" that are for more experienced traders. The easiest option is to choose “Amount” where you can select how much money you wish to invest. The app will calculate the part of the share it will need to buy.
Once you’re ready, click “Buy”. You’ll have to agree to the terms and conditions, but then congrats, you just bought your first ETF!
The costs of investing through Trade Republic
They say there’s no free lunch in investing. As such, there are some fees you have to pay when you’re buying an ETF through Trade Republic:
- Total expense ratio (TER) of the funds. Fund providers charge this fee for managing their funds. In the case of IWDA, the fund provider iShares charges 0.20% per year on your total investment.
- Transaction fee: it costs €1 per transaction on Trade Republic to buy an ETF.
Trade Republic is one of the cheapest brokers available to French investors. However, there are some considerations when investing with Trade Republic:
- They’re a foreign broker: this means you have to declare your foreign Trade Republic account when you’re filing your taxes yearly. Don’t forget to do so otherwise you could face a €1,500 fine!
- “Frowned upon” business model. They make money from selling your market orders. As written in their terms: “In connection with the execution of transactions in financial instruments, Trade Republic may receive payments from the operators of the execution venues or counterparties of the execution transactions” (see section 4.2. of their customer agreement). This system is called "payment for order flow", and the largest downside of the business model is that you may get a worse price for your trade than with other brokers. So although the commission is lower, you may end up paying more through a higher price when buying, or selling at a lower price.
Option 2: investing through an investment app
The difficulties of investing your life savings through a broker
Choosing a single ETF is not the entire story when investing your life savings. To bring success over the long term, you need to build a portfolio of ETFs that is suited to your goals, your appetite for risk and your capacity for taking risks. But this is not an easy task, as there are thousands of ETFs to choose from.
The right allocation of your portfolio is not the only challenge when investing though. You need to find the best broker for you that matches your needs. You need to understand the subtleties of taxation to avoid paying unnecessary taxes that eat up your investment return. You need to set up an investment strategy where you for instance invest a fixed amount every month.
The easier way: Curvo
We understand these difficulties, and that's why we built Curvo:
- Portfolio built for you: we ask you a few questions at the start to learn about you and your goals. Based on your answers, we match you with the best portfolio for you. No need to choose which ETFs to buy.
- Diversification: we firmly believe in the power of diversification to lower risk and seek investment returns. Each Curvo portfolio consists of over 7,500 companies, diversified across sectors and countries.
- Sustainability at the core: Curvo focuses on one guiding principle: we 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 all excluded.
- Rebalancing done for you: no need to worry about keeping your portfolio in balance, Curvo will handle this for you.
- Fractional shares: all your money is invested. There’s no cash left sitting on the side.
- Automated investments: using direct debit, you can set up a savings plan through the app and make money whilst you sit back and relax.
- Start from €50: no need for a large lump sum to get started.
- Projections: through Curvo you can see how much your portfolio is expected to be worth in the future. You can answer questions like “how will increasing my monthly contribution by €50, €100 or €200 affect my long-term savings?” to give a concrete idea for the “future you”.
- Withdraw anytime: there’s no long-term contract or exit fees if you wish to stop investing with Curvo.
Curvo is for you if:
- You are worried of making a mistake when investing
- You don't want to spend time choosing a broker
- You don't want to spend time making the trades
- You don't want to figure out a rebalancing strategy and execute on it
- You want fractional shares
- You want peace of mind that your investments are taken care of
Learn more on the differences between doing investments yourself through a broker and investing with Curvo.
Coming soon to France 🇫🇷
We started in Belgium, but we are launching shortly in France! Download the app and leave your email to be notified when we launch.
There are a few things French investors need to look out for when investing in ETFs. First, you need to select the right ETF. Secondly, you must pick the right fiscal envelope for you: PEA, assurance-vie or compte-titres.
We then showed how to buy your first ETF through a broker, by taking the IWDA ETF and Trade Republic as an example. But managing your own investments can be challenging. It's all about making the right choices: choice of portfolio of ETFs, choice of broker, understanding taxation… Making these choices is difficult when we're talking about your life savings.
We built Curvo to address those difficulties and help you navigate the complexities of starting to invest. You can get your money working for you in no time. We're launching in France very soon, so download the app and leave your email to be notified!