This article dissects the universe of index investing for Italians, delving into every aspect from A to Z. After outlining the considerable advantages of this investment strategy, we'll take you through the basic steps for buying index funds in Italy. If you're in a rush, feel free to skip down to the part where we show the three ways to buy index funds as an Italian investor.
What are index funds?
Index investing, also called passive investing, is a proven method of growing one's wealth. It is based on the observation that rather than picking individual stocks and trying to buy and sell at the right time, it is usually more profitable to invest in the stock market as a whole. Instead of looking for the needle in the haystack, you buy the whole haystack.
When investing passively, you invest in a type of fund called an index fund. Each index fund follows a specific index, which is a collection of securities that follows strict rules on how the securities are included and how much of each company the index contains.
The most famous index is the S&P 500, which contains the 500 largest 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 Italian one is the FSTE MIB, which consists of the 40 best companies in the country.
Since the creation of the first index fund in 1976, index investing has proven to be a great way to invest. By effectively becoming a part-owner of thousands of stocks around the world, index investing allows anyone to earn a dividend from the growth of the world economy.
The graph below shows the growth of the S&P 500 index since 1992. An investment of €10,000 in 1992 would have resulted in over €220,000 by the end of 2022, or an average return of 10.6% per year!
Why invest in index funds?
In the past, the predominant approach was active investing, where one deliberately selected certain stocks with the hope of buying them at an undervalued price and reselling them later at a profit. Index investing, on the contrary, adopts a broader perspective. Instead of concentrating on a few supposedly winning stocks, one aims to invest in all stocks simultaneously, thus achieving a return that reflects the average of the entire stock market. The preference for index investing is justified for several reasons.
Why index investing is great for Italians
There are several reasons why index investing is one of the best ways for Italians to grow their wealth.
One of the problems associated with active investing is the high fees. Index investors pay lower fees because index funds are very cheap to manage. It is simple to track an index: all that is required is to buy the shares in the index and update when the index changes. It does not require expensive analysts or other specialists.
One of the goals of index investing is to diversify as much as possible. We have seen that an index fund such as 'iShares MSCI ACWI' invests in 2,800 companies in 47 countries. By diversifying across many countries and sectors, you eliminate unnecessary risk. And you benefit from the growth of the best companies in the world, not just the big Italian, French or American companies you know. By investing in as many companies as possible, you are almost certain to include the winners, the minority of stocks responsible for most returns.
Rooted in the real economy
Most index funds invest in stocks or bonds, issued by real companies, with real factories, employees, intellectual property, and so on. This is different from, for example, the world of cryptocurrencies, where the value of a currency or token is mainly determined by its potential rather than concrete applications.
You can buy and sell when you want
Index funds are very easy to buy and sell. If you wish, you can trade any index fund in a matter of minutes. In financial jargon, we say that index funds are 'liquid'. This is an advantage over other types of investments such as real estate or art. For example, selling a house can take a long time before you find the right buyer.
You can invest with low amounts
Another advantage of index investing is that you do not need a lot of capital to get started. You can even invest with as little as €50. This makes index investing accessible to everyone, especially to young people who are just starting their careers and want to grow their wealth by investing their savings. In contrast, real estate is much less accessible. Just the down payment for a property mortgage requires several tens of thousands of euros.
It is tax-efficient
In most European countries, investing in stock markets is tax-efficient compared to other types of investments. If profits from investments are reinvested directly into the fund, they are only taxed when the money invested is withdrawn. We wrote a guide for taxes you should know about as an Italian investor.
Great for beginners
Index investing is one of the best ways for new investors to start investing. It is a proven strategy and does not take too long to set up. Moreover, it is much less risky than investing in individual stocks or trading highly leveraged instruments such as options or CFDs.
Long-term index investing has worked in the past. And there is no reason why it should not work in the future as well. Just take the MSCI World global index as an example, consisting of 1,500 companies in 23 countries. It has provided an average annual return of 10.6% since 1979.
The differences between index funds and ETFs
As mentioned above, an index fund is an investment vehicle that invests in a selection of securities representative of a specific index, and its management aims to replicate the performance of that index. On the other hand, an ETF is a specific type of index fund that is traded on an exchange like a single stock. While both seek to replicate an index, ETFs can be bought or sold at any time during trading hours, just like ordinary shares, and offer greater flexibility than traditional funds, which are generally traded once a day after market close.
How to invest in index funds from Italy
When deciding how to invest in Italy and considering index funds, you have three routes to follow:
- Through a broker: if you wish to retain full control over your investment operations, this is the option for you. Through a broker, you will have the freedom to independently manage your financial choices.
- Through an app like Curvo: if you prefer a simplified and managed approach, an app like Curvo could be the ideal solution. Here, every detail is made more accessible and managed for you, making index investing a smooth and uncomplicated experience.
- With a financial advisor: for those who seek personalised advice but still want to keep control of their savings, the financial advisor option offers the right balance. You will receive expert advice while managing your financial resources independently.
Investing in index funds via a broker
The first option is to take over the management of your investments and do so through a broker. The broker acts as an intermediary between you and the stock exchange, where you can buy and sell the ETFs that follow the indices in your portfolio. The steps are as follows:
- 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, differing in:
- Their fees, as some are cheaper than others.
- How they handle taxes. In general, domestic brokers take care of declaring and paying all the taxes you owe, following the administered regime. Foreign brokers (like DEGIRO or eToro) tend to transfer the responsibility (and tax risk) to you, adopting the declarative regime.
- The ease of opening an account. Some provide structured apps, while others only offer an impractical web application.
Buy index funds for your portfolio
Once you have chosen a broker and opened an account, you can buy ETFs for your portfolio. The details depend on your broker and country of residence.
Invest every month
Index investing works best when you adopt a buy-and-hold strategy. But when should you buy? Every year? Every three years? Every month? We think your investments should follow the rhythm of your income. If you are paid monthly, invest monthly. If you are self-employed and receive payments approximately every quarter, make a purchase every quarter. This process of buying at regular intervals is called dollar-cost averaging (commonly abbreviated to DCA), or euro-cost averaging in Europe.
The difficulties of investing through a broker
It has a steep learning curve
Managing your ETF portfolio through a broker can be challenging. You have to choose indices, build your portfolio with the right combination of indices that suit you and your goals, and choose ETFs that follow these indices. For each step, there are thousands of options. But that is not all. Understanding the tax system is equally important, as is learning how to use your broker or knowing when to rebalance your portfolio.
You may not have the time, the motivation or simply the interest in finance to overcome the learning curve. Or you would rather spend time on more important things than managing your investments.
It takes time to execute
If you invest every month, you have to send money to your brokerage account, calculate how many securities of each ETF to buy, send orders and follow the evolution of your portfolio. From our experience, this process is fun the first few months when everything is new, but becomes cumbersome later on.
Costly for monthly investments
It makes sense for most people to invest monthly because it follows the timing of their income, and you invest regardless of whether the markets are low or high. But brokers often charge a fixed commission per transaction. When you invest a smaller amount each month, the commission can be prohibitively expensive and have a disproportionately negative impact on your return. Having more funds in your portfolio only makes the problem worse.
Creating your portfolio and making initial purchases is one thing; maintaining it over the years, especially when markets are down, is another challenge. This requires discipline if you want to ensure the long-term success of your portfolio.
Brokers want you to trade
Brokers make money from each transaction and earn much more from customers who trade frequently. Therefore, as an index investor with a buy-and-hold strategy, you are an unattractive customer for them. Their incentives conflict with yours. Moreover, many broker apps are designed to incentivise trading. For example, they show the most traded stocks of the last 24 hours on the main screen, hoping that you will buy the hot stock that has gone up very recently. Obviously, this is a bad reason to invest in a stock.
Let's see how the next option, index investing via the Curvo app, addresses the issues of investing via a broker.
Curvo app: 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 to invest in index funds
Let's now take a closer look at three index investing methods we discussed prior.
Index investing with a broker
- Maximum decision-making autonomy.
- Full control of transactions.
- Potentially lower costs if you choose a good option.
- Requires time and effort for research and management.
- Steep learning curve.
- Lack of personalised advice.
Investing with Curvo
- Eliminates learning curve.
- Tailor-made diversified portfolios built for you.
- Sustainable investing with no extra transaction fees, just a service fee.
- Annual fees are higher than broker costs.
- Can't choose what to buy
Investing with a financial advisor
- Assistance from a financial professional.
- Advice on tax aspect.
- They can customise your investments depending on your needs.
- Potentially higher fixed costs.
- Requires a significant amount to be affordable.
- Need to select a trusted advisor.
We hope this resource has been helpful for you in making a decision on how to invest your savings in index funds.
Questions you may have
What are the best index funds for Italians?
Good question! Unfortunately, there is no straightforward answer because it depends on you and your objectives. Based on our criteria for selecting an ETF, there are a few ETFs that we think are a good choice for most investors:
- VWCE: follows the FTSE All-World Index
- IWDA: tracks the MSCI World index
- EMIM: tracks the MSCI Emerging Markets Index
- SXR8: tracks the S&P 500 Index
- DBZB: a bond ETF that follows the FTSE World Government Bond Developed Markets (EUR Hedged) index
- VUSA: follows the S&P 500 Index
What is the average return of an index fund?
A global index like the MSCI World has had an average return of 10.9% since 1979.
I want to start investing but I'm not sure at how much?
This is an important question that does not receive enough attention. Most resources only focus on the mechanics of investing (like this article!) and leave this question unanswered. There are four steps to determine how much you can invest each month:
- Determine your income.
- Estimate your expenses.
- Calculate the value of your emergency fund.
- Calculate how much you can invest each month.