How to invest in ETFs in Italy

What are ETFs?

ETFs (Exchange-Traded Funds) are investment funds that invest in hundreds, or even thousands, of stocks, bonds, or other types of investments. This diversification is one of the benefits that make ETFs work compared to an individual stock. Instead of investing in one or several companies, you track the performance of an entire 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 Italian index is the FTSE MIB index, which consists of the 40 largest companies in Italy.

Because the majority of ETFs are designed to track a market index, they're sometimes also called "trackers". The style of investing based on indexes is called index investing, which is also known as passive investing because you typically hold your investments over the long term. When passively investing, you choose to ignore day-to-day price changes knowing that the market will keep growing long-term. Data shows that this strategy gives the highest return in most cases.

Why ETFs are a good investment

Some of the benefits ETF investments offer:

1. They’re 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!
2. Diversification: you’re exposed to thousands of companies in one go through a single fund. And diversification is key to good investing.
3. 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.
4. Low costs: ETFs are a cheap way of investing due to the economies of scale and lack of active management fees.

But, in order to access the benefits of ETFs, you have to select the right ones for you, taking factors like the distribution of dividends and taxation into account. Let’s discuss how to do it.

How to select the right ETFs

To know how to select the right ETF investment for you, you need to consider the following criteria:

1. Accumulating vs distributing
2. Taxation
3. Asset
4. Currency
5. Replication

Let's now dig into each criteria.

Accumulating vs distributing dividends

An accumulating ETF directly reinvests the dividends into the fund for you. Even though you don't get a payout in cash, you still benefit from the dividends. The value of accumulating ETFs increase faster than their distributing counterparts because of the reinvested dividends.

On the other hand, distributing funds work differently. Companies share their profits with shareholders through the payout of dividends. For instance, each quarter a company like Microsoft distributes a dividend to everyone who owns shares in Microsoft. The  dividend is per share, so you earn a higher total dividend the more shares you own.

An ETF that invests in hundreds of stocks receives all these dividends. And if you own that ETF, you are entitled to your share of the dividends. Likewise, bond ETFs receive interest payouts from the underlying bonds.

A distributing ETF will pay out these dividends in cash to you, usually every quarter. This can be great if you’re looking for regular income from your ETF investments and choose an ETF that targets companies with a consistent dividend yield – of, say, 2%. However, you are likely to incur more costs with distributing dividends, especially in Italy. This is not only because of fees but because of taxation. Let's dig into that.

Taxation

When you start investing from Italy, you've got to consider the taxes. The standard tax that applies to your return is 26%.

It can be confusing when you're buying ETFs as to how to declare this tax. There are three main ways of applying this tax to your investments:

1. Regime Dichiarativo (Declarative System)
2. Regime Amministrato (Administered System)
3. Regime Gestito (Managed System)

Taxes are applied to both accumulating and distributing ETF investments. With this in mind, it is usually best for Italian investors in the saving phase of their investing to opt for accumulating ETFs. This is because distributing ETFs fall under the Regime Amministrato, meaning that withholding tax will be paid by your broker each time you receive a dividend.

With an accumulating ETF, on the other hand, you only have to pay tax on your income once: when you sell the ETF. This keeps your investments tax-efficient as you're only paying it once at the sale and on the capital gains.

It can also be even lower depending on the type of assets you choose. Let’s keep going.

Asset type

The asset class included in an ETF investment is important to consider when it comes to the type of risk and rewards they represent, as well as how much they are taxed.

You can pretty much buy an ETF of everything but here are a few common examples:

Why stocks?

Stocks are the main drivers for returns. Throughout the decades, companies all over the world have continued to innovate and thereby yield solid gains to their investors. Global stocks have made an average annual return of 5.2% over the last 120 years, and that's after inflation. There is no sign that this trend will stop: the drive to create and innovate is an innate trait of human beings.

What's a bond then?

Governments issue bonds to borrow money from investors that they spend on public services. So a bond is a loan to a government. Government bonds tend to maintain their value during a downturn. Their role is to stabilise your portfolio and protect

Investing in bonds in Italy is tax advantageous. Government bonds in EU states come with the added advantage that they are taxed lower than other types of assets, at just 12.5% – that’s less than half the usual rate. This rate also applies to “whitelisted” countries whose tax systems are compliant with EU states but are outside of the EU, such as Canada, the United States, and the United Kingdom.

If you're looking to learn more about ETF asset allocation, you should check out our guide on how to build your optimal ETF portfolio.

Currency

If you buy a fund that is not traded in Euro (€), the broker will likely convert it for you.

Given this is a source of revenue for brokers, it often comes at an additional cost for you. For this reason, it's best to invest in funds that are trading in Euros.

Replication strategy

Some ETFs are cheaper through a technique called synthetic replication.

This is when, instead of actually buying the ETF shares of the companies in the index, the fund provider uses financial engineering like derivatives to replicate the returns of the index ETF by making a deal with a third party (typically a large investment bank).

If you think that sounds a bit shady, we think so too. The main issue with synthetic replication is that it introduces an additional risk that the counterparty will not be able to honour their swap agreement and hand over your returns.

And when investing our life savings, we want to limit the risks that are avoidable. Instead, invest in funds that use physical replication as their strategy to avoid being leveraged by third parties and introducing unnecessary risk into your portfolio.

Doing your research with 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 to Italians.

How to buy an ETF in Italy: a step-by-step guide

When deciding how to invest money in Italy and considering ETFs, you have a couple of options to invest:

1. A broker
2. An investment app

Before we discuss their differences, let’s talk about the ETF we’ll be purchasing.

VWCE as the example

To show you how to buy an ETF, we are going to use the popular ETF VWCE.

VWCE is the ticker symbol for "Vanguard FTSE  All-World Accumulation" (ISIN: IE00BK5BQT80), one of the most popular ETFs for Italians and that satisfies all the criteria above. It's accumulating, trades in euro and is physically replicated.

VWCE tracks the FTSE All-World index. One of its main benefits is that it's broadly diversified: it invests in over 4,000 companies from more than 40 countries. It contains both large and mid-size companies, from "developed" markets (US, Germany, UK, Japan…)  as well as "emerging" markets (Brazil, China, Chile…). An investment in VWCE means an investment in a big chunk of the world economy. It has delivered an average 8.38% per year since 2005.

Option 1: invest in ETFs via a broker

ETFs are traded on stock exchanges. Famous stock exchanges include the New York Stock Exchange (NYSE), Nasdaq, and the London Stock Exchange (LSE). But for tax and cost reasons, Italians should invest through an Italian or European stock exchange. Examples are Borsa Italiana or Euronext.

To access the stock exchange, you have to go through an intermediary. One option is a bank but they usually charge high fees. Let’s take a look at how this works with Fineco which is both a bank but also an online brokerage.

To buy and sell ETFs through Fineco, you need a Fineco current account or a separate investment account. To set this up, you need your:

• Proof of Italian residency
• ID
• Smartphone

Once your account is set up, make a deposit. With Fineco, there is no minimum deposit to start trading ETFs. Head to the "Markets and Trading" area, where you’ll find the ETF investments. Select the one you want to buy from the ETF Centre or in the ETF Search.

For example, if you click on the VWCE ETF and click “Ordina” (“Order”), you will be able to select the quantity you want to buy:

You also need to choose whether to invest manually or use the Replay Plan to invest automatically. One neat feature with Fineco is that it allows you to automatically invest. The Replay Plan allows you to set up recurring purchases of ETF investments of your choice.

This all seems simple enough but how much will it cost?

Costs of using Fineco

If you have a trading account with Fineco, you'll pay 0.19% of the order value for each purchase and sale. The minimum fee is €2.95 and the maximum fee per trade is €19.

Fineco as mentioned above allows for a Replay Plan. The cost depends on how many ETFs you buy. It starts from €2.95 per month to purchase one ETF but can be up to €19.85 for 12. Depending on how much you plan to invest, this could cost you especially as you're essentially paying a subscription fee. Note that if you're reading this and under 30, there are a lot of discounts available, and you can also get an account for free.

However, Fineco's pricing can be confusing depending on whether you have a standard or trading account. Fineco pushes you to trade as the more trades you do in a month, the cheaper fees you pay.

Fineco has a selection of zero-fee ETFs

One benefit of using Fineco is that similarly to DEGIRO's core selection, they have a selection of 30 ETFs which are "free" to purchase. Fineco can offer these ETFs as they receive a fee from the ETF issuer. Unfortunately VWCE or any Vanguard funds don't feature but here is a selection of five interesting ones to look out for:

The other costs of investing through a broker

As well as the transaction fee, you'll have to also pay the total expensive ratio (TER) to the fund provider. Fund providers charge this fee for managing their funds. For example, VWCE costs 0.22% per year on the total invested. They automatically deduct it from the performance of the fund. You can find the TER by searching through the “Key Investor Information Document” (KIID) as many brokers do not openly list the fee. The website justETF.com also shows the total expense ratio of any ETF.

You can't buy fractions using Fineco

Fractional shares are what they sound like: they allow you to purchase a fraction or part of a share based on your budget rather than only being able to buy whole shares. For example, if you had €125 to invest but each share only cost €50, you would have 2.5 shares.

Fractional shares enable you to buy what you can afford and build up a portfolio that might otherwise be inaccessible. One of the advantages of ETF investing is that it allows you to diversify your portfolio. Buying multiple ETFs with fractional shares can make a diverse portfolio even more accessible.

Unfortunately you're unable to buy fractional shares with Fineco.

Option 2: invest in ETFs via an investment app

An easier option is passively investing your savings using an investment product like Curvo.

Instead of spending hours scouring the internet for detailed information on how to invest or handing over a chunk of your investment to a broker, Curvo puts the power in your hands.

Through Curvo you can:

• Invest in a portfolio tailored to you: based on a questionnaire, the right mix of funds that correspond to your goals and appetite for risk is selected. The investments are managed by NNEK, a Dutch investment company under the supervision of the Dutch regulator (AFM).
• Set up a savings plan: put your savings on autopilot. Choose an amount, and it will automatically be invested every single month. You can start from €50!
• All your money is invested: in contrast with the majority of brokers, your investments with NNEK, through the Curvo application, support fractional shares. This means that all your money is put to work. There will never be cash sitting on your account doing nothing.
• No entry or exit fees: there are no transaction fees, entry or withdrawal fees.

Find out more about how this compares to using a broker. At the moment, we’re based outside of Italy, which means that you would have to handle the taxes yourself under the Regime Dichiarativo.

Curvo is coming soon to Italy 🇮🇹

Soon, Curvo will be opening in Italy, giving Italians even more control over their investment portfolios.

That means that if:

• you're worried about 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 investment objectives are taken care of

Curvo is coming to Italy shortly. For now, download our app and leave your email to be notified when we launch.

Summary

In this article, we’ve walked you through:

• What ETF investments are
• Why they’re a good investment for the future
• What to consider when shopping around
• How to invest in ETFs in Italy

We understand that choosing the right investment is a difficult decision. These are your life savings, perhaps even your pension pot, and you don’t want to see them eaten away by unnecessary fees or by making poor investment decisions.

Curvo can help. By taking the hassle out of ETF investment while keeping the power firmly in your hands, we can help you make an informed decision about ETF investing.

Questions you may have

What are the best ETFs to invest in?

Based on our criteria for selecting an ETF, there are some ETFs that we think are a good choice for most investors:

• VWCE: tracks 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: bond ETF that tracks the FTSE World Government Bond - Developed Markets (EUR Hedged) index
• VUSA: tracks the S&P 500 Index

What are the main types of ETFs?

As ETFs are pooled investment securities, it is possible for many different types of assets to be represented by ETF investments. For example, real estate investments include shares in companies that own real estate, such as hotels.

What are the risks of an ETF?

Because ETFs are, by their nature, diversified, they carry less risk than trading stocks. However, they do have some potential risks:

1. Market risk. Because they are tied to the stock market, if the market crashes, the value of your investment drops.
2. Tax risk. The capital gains tax rate in Italy is 26% on investment profits; if you choose a distributing ETF, you could lose a lot of your margin.
3. Counterparty failure. When investing in synthetically replicated ETFs, you run the risk that the counterparty responsible for your investment cannot pay.

How much is it worth investing in ETFs?

How much it’s worth investing in ETFs depends on you and your budget and aspirations.

Let’s say you’re a 29-year-old potential investor planning to pay yourself €2,500 per month when you retire. That means you need to save around €150,000 when you subtract your pension from the government.

The rule of thumb is that you should save or invest around 20% of your earnings. However, many people struggle to save 20% of their monthly salary. Investing in ETFs can help you catch up on retirement savings to reach your goal on time or even exceed it sooner.

For instance, if you set aside €500 today and invest it in a fund with a 6% yearly return, it will have grown to €4,073 by the time you’re 65.

In the short term, plan how much you invest in ETFs using our backtesting tool.

What are the rules of ETF investment in Italy?

Generally speaking, ETF investments are taxed at 26% in Italy when the dividends are paid out or when a tax return is filed.

However, there are exceptions for government bonds in EU and whitelisted countries. Read our guide on Italian taxes to learn more.

What's the difference between an index fund and an ETF?

An index fund and an ETF are both types of investment vehicles designed to track the performance of a specific market index. But they differ in structure and how they're traded.

An index fund is a type of mutual fund that pools investors' money to purchase a diversified basket of assets that mimic the composition of the underlying index. It is typically bought and sold at the end of the trading day at its net asset value (NAV).

On the other hand, ETFs trade like stocks on an exchange, allowing investors to buy and sell shares throughout the trading day at market prices. This intra day trading flexibility and liquidity is a key difference between ETFs and index funds.