When we talk about US or EU ETFs, we refer to the domicile, i.e. the country/region in which the ETF was issued. For example, the S&P 500 Index can have both a US-domiciled and an EU-domiciled ETF (usually in Ireland or Luxembourg). They would track the same index but have a different domicile. This is important from a liquidity, taxation, and regulatory perspective.
What's the difference in taxation between US and EU ETFs?
Trading ETFs may involve withholding taxes, income taxes or capital gains taxes. Consult your accountant or tax advisor for more details. Taxation will depend on the ETF's domicile as well as on your tax residency.
Liquidity of US and EU ETFs
The more liquid an ETF, the easier it is to buy or sell it at a very low spread cost. You won't have any problems with a big name, like the Vanguard Total Stock Market ETF or Invesco's QQQ, but a niche ETF such as a South-American Green Energy Small Cap ETF can have very low, if any liquidity.
Generally speaking, ETFs domiciled in the EU tend to be less liquid than their US counterparts. Therefore you will likely encounter higher spreads when trading some EU ETFs (save for the bigger ones). This should be perfectly fine with buy-and-hold investors, but those trading these vehicles in the short term should take notice.
How are ETFs regulated? Can you invest in US ETFs from the EU?
Since January 2018, European clients are largely blocked from trading many US-domiciled ETFs. The list includes popular ETFs such as SPY, IVV, VTI and QQQ, among many others. This is because the documentation of most US-domiciled ETFs is not fully compliant with EU regulations. For more info, read our article here.
To get around this obstacle, you can apply to qualify as a professional client at your broker; if you meet all criteria, you'll be allowed to trade US ETFs. Alternatively, you can invest in ETF-like mutual funds.
What else do you need to know about ETFs?
Want to know more before deciding which is the best ETF for you? Check out these articles to deepen your knowledge:
- What is an ETF?
- What is the difference between mutual funds and ETFs?
- What does an ETF portfolio mean?
- What is an ETF expense ratio?
- How to invest in ETFs?
- How liquid are ETFs?
- How to buy Vanguard ETFs?
- How to buy iShares ETFs?
- What are sector ETFs?
- What is passive investment?
- Are US ETFs only available for US residents?
How can I buy ETFs?
For more info, click here to learn how to buy ETFs online.