When you're ready to start investing, ETFs often come up as a recommended option. They're praised for their low costs, diversification, and simplicity. But as a Belgian investor, you might find yourself overwhelmed by the choices and confused by the process. Should you choose accumulating or distributing ETFs? What about the tax implications? And how do you actually buy an ETF?
Don't worry - we've been there too. In this guide, we'll walk you through everything you need to know about investing in ETFs in Belgium, from understanding what they are to making your first purchase.
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.
Most ETFs track a market index, which is why they're also called trackers. Index investing is a style of investing based on indexes, and where you typically hold your investments for the long term. With index investing, also called passive investing, you ignore daily price changes. You trust the market will grow long-term. And the data shows that this strategy gives the highest return in most cases. For example, a globally diversified ETF like IWDA, which invests in more than 1,400 companies in the MSCI World index, has returned an average 10.2% since 1980:
Why invest in ETFs
There are several reasons why ETFs are the best long-term investment for most people:
- Best suited for the long-term
- Diversification
- Simplicity
- Cheap
Best suited for the long-term
Investing in ETFs compounds 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.
Why not invest in ETFs
Of course, ETFs aren't for everyone. There are cases where another type of investment may suit your goals better:
- You invest for the short term. The compounding effect of investing in stocks and bonds through ETFs really becomes apparent over the long term. Furthermore, your investment horizon must be sufficiently long to cover the volatility of the financial markets. If you plan on investing only for a year or so, a savings account or state bond is likely a better option.
- You don't have an emergency fund. Before you start investing, it's important to build an emergency fund that you can easily tap into without having to sell your investments. An amount between 6 and 9 months of expenses should be a sufficient buffer.
- You have very strong ethical preferences for investing. There are many sustainable ETFs that track ESG versions of indexes. I's a growing market. But those might not be enough for your principles. In that case, you're better off hand-picking the stocks that match your views.
- You think you can consistently beat the market. There aren't many, but there are investors like Warren Buffett or funds like Renaissance Technologies that can beat the market on the long term. If you're in that category, you can earn a higher return with other instruments than ETFs. Beware not to confound luck with skill though. Beating the market once or twice can be luck. But it takes true skill to do it consistently for several decades.
Are ETFs risky?
ETFs are not riskier than other investments. First of all, fund providers are bound by strict regulations, enforced by both the European regulator ESMA as well as national regulators. A strong guarantee is the separation of assets. When you invest in an ETF, the shares are held in your name and safeguarded by a separate entity, a custodian. So even if the fund manager would go down, you still hold all your assets. In fact, this is much safer than with a savings account. If you deposit €1,000 on your savings account today, it will be gone tomorrow. It will have been lent out to someone who needs a mortgage, or a company getting a loan. So if the bank goes bankrupt, you lost your money (that's why there's the bank deposit guarantee). This can't happen with an ETF.
But the reason why people perceive ETFs as risky is the market risk. Because they invest in the financial markets, their value fluctuates with the market. Whereas the value of a savings account will never go down (at least without taking into account inflation), the return of an ETF can be negative.
This is an advantage though. Because risk and return are always linked. An ETF carries a higher market risk, but it means we get a higher expected return. A savings account has no market risk, at the cost of a very low return and a high probability you will not meet your financial goals. The higher expected return of an ETF offers a better chance of attaining your goal, for instance, retirement.
The chart below compares a savings account with the IWDA ETF, a broadly diversified ETF. The value of the savings account does not move much, but also does not grow much. The ETF is more volatile, but its value multiplied by almost 6 times.
How to find the right ETF
Choosing an 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:
- Through a broker, where you manage your own portfolio of ETFs
- 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.
Conclusion
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 co-founder Yoran and his co-author Tim Nijsmans wrote it. It is the best beginner's guide to ETF investing for Belgians. Learn more in the interview with Yoran.