As online brokers gain more popularity, buying an ETF in Belgium has become a fairly straightforward process. We are welcoming this trend as we believe that passive investing, or investing in index funds and ETFs, is the best way for most people to invest for their future.
But with thousands of ETFs to choose from in Europe, how does the Belgian investor pick the best ones? That's the question we're answering here.
We’ll quickly run through what an ETF is and then highlight the most important criteria you should consider before buying:
- accumulating vs distributing
- type of asset
What’s an ETF?
An ETF 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 invested in 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". A popular ETF for Belgian investors is VWCE. This fund tracks the FTSE All-World index. As its name implies, this index is global: it consists of over 4,000 companies from more than 40 countries. It contains both large and mid-size companies, from both "developed" (US, Germany, UK, Japan…) and "emerging" markets (Brazil, China, Chile…).
The style of investing based on trackers is called passive investing, as you typically purchase and hold your investments over the long-term, choosing to ignore day to day market price changes knowing that the market will keep growing long-term. Data shows that this strategy is most likely to give you the highest return .
What Belgian investors need to pay attention to
Distribution of dividends: accumulating vs distributing
Any Belgian that perceives a dividend has to pay a 30% tax on it. As the name suggests, distributing funds distribute their dividends, which means they're taxable. No matter if you have a stock or bond ETF, you’ll have to declare and pay that tax. On the other hand, accumulating funds directly reinvest the dividends into the fund before you ever receive it. The dividend translates into a greater increase in the value of the fund. Unless you have a good reason not to, we suggest buying only accumulating funds because you won't be taxed on the dividend. As capital gains are not taxed in Belgium, this means your accumulative ETF will not be taxed when sold.
Luxembourg and Ireland have special tax treaties with the US that make it attractive to set up funds there. As a Belgian investor, you can benefit from this by investing in funds that are domiciled in one of these two countries.
As mentioned earlier, the popular Vanguard FTSE All-World (VWCE) ETF is domiciled in Ireland. You can tell this from its ISIN code IE00BK5BQT80 (the "IE" stands for Ireland). The ISINs of funds domiciled in Luxembourg start with "LU".
As we highlighted above, accumulating funds reinvest the dividends automatically in Ireland before it is distributed in Belgium. This does not trigger a taxable event in Belgium.
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 fund size is a good indicator of a product’s popularity. As an investor, you’re looking for an investment that is viable in the long run, so you’d want to avoid a fund shutting down after a couple of months. 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.
One important thing to note is that you don’t lose your money if an ETF is liquidated. In fact, the underlying assets of the ETF are still worth their market value, meaning you’ll receive the value of your ETF shares when the assets are sold.
Type of asset
When choosing your ETF, you need to select the right asset class: equities, bonds, commodities… Each has its role in an investment portfolio. For instance, it’s often recommended to invest more in bonds as you get older, because lower volatility becomes important as you approach retirement. In Belgium, profits on stock funds are not taxed but the gains on your bond funds will be taxed due to the Reynders tax. As soon as a fund consists of at least 10% bonds, there is a 30% tax on the profits made when selling.For example, if you bought a bond fund at €100 and end up selling it later for €130, your net profit will only be €21. The other €9 will go to the Belgian state through this tax.
This is a difficult one as your instinct would be to go "all-in" on stocks to not pay the Reynders tax. But stocks can go up and down drastically, and you may need an allocation to bonds in order to be able to go through downturns without panicking and making irrational decisions (such as selling all your investments). Such a mistake is more costly than paying some Reynders tax on your bonds.
Some index funds are cheaper through a technique called synthetic replication. Basically, instead of actually buying the shares of the companies in the index, they use financial engineering to replicate the returns of the index by making 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. Avoid!
The cost of an ETF
Fund managers charge a fee for managing their funds. The total cost of a fund is indicated by the total expense ratio (TER). They automatically deduct it from the performance of the fund so when you look at a fund’s performance, it is usually presented net of fees..
The advantage of an index fund 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%, on top of which you need to pay entrance fees.
Transaction tax (TOB)
As a Belgian resident, there’s a tax on the transaction ("beurstaks" or "taxe sur les opérations de bourse" or TOB) every time you buy or sell a security. If the ETF you are purchasing or selling is registered on a particular list maintained by the European Economic Area, then the tax equals 0.12% of the transaction amount.
For ETFs like the one we’ve highlighted, VWCE, the transaction tax is set at 0.12% of the transaction amount. To learn more about the taxes on your investments, we suggest you explore our piece on Belgian taxes.
How to do your research: justETF
justETF.com is the best resource that we're aware of to compare ETFs. It shows most of the information that we mentioned in this article for thousands of ETFs available to Europeans. Below is what it shows for VWCE (highlights from us):
An ETF as a building block for your portfolio
Choosing an ETF is not the end of the story: it's a small part of building a portfolio that will give you success over the long term. Defining the right portfolio is probably the most important and most difficult task for every investor. The composition of your portfolio is dependent on goals, your appetite for risk, your age and your income.
We understand this difficulty, along with the many other subtleties investors have to deal with in order to be successful over the long term. If you’re looking to take all those complexities away, we recommend you take a look at Curvo.
As we’ve highlighted throughout this article there’s a variety of criteria to consider before choosing an ETF. If there are any you should remember, these are the two::
- always select an accumulating ETF to avoid paying dividend taxes
- invest in funds domiciled in Ireland or Luxembourg
An investment app like Curvo can help you navigate these complexities. But if you’re going solo with your investments, focus specifically on the Belgian considerations listed above when you’re next searching on JustETF and double check your choices before clicking “buy” on the chosen ETF.