Where to buy ETFs? Some useful tips

Where to buy ETFs? Investors who are interested in ETFs are certainly asking themselves this question. There are several options, and each has both advantages and disadvantages. It is worth knowing them in advance to make a good decision.

What are ETFs? Where to buy ETFs?

ETF is an acronym for Exchange Trade Funds, and this stands for an investment fund that is listed on an exchange. It is designed to reflect the valuations of a broader section of the market, not just the shares of a single company. If a person wonders what an ETF fund is, they follow the price movements of entire bond, stock, or commodity indices.

ETFs were created to make investing easier, for example, the world’s most popular stock index, the S&P500, includes 500 companies. Picking the best of them for many could be a challenge. ETFs make this selection easier by allowing investment in the entire index.

ETFs are usually passive in nature, meaning their creators are not interested in racing against the broad market to beat it. They aim to replicate the price movements of specific indexes as accurately as possible. This is a sound strategy since statistics show that 70-90% of actively managed mutual funds lose to the broad market.

Where to buy ETFs?

ETFs also entice investors with their relatively low costs, which are typically almost 10 times less than the transaction costs associated with standard funds that are not listed on an exchange.

ETFs are continuously traded and have high liquidity, making it easy to get in and out of investments. Traders can even engage in day trading, that is, closing and opening up dozens of investments in a single day. As for classic fund shares, they cannot be sold so cheaply and easily.

Trading in ETFs is reminiscent of trading in stocks, so when an investor has experience in this matter, deciding to trade in ETFs should not be a problem.
ETFs can be bought on one’s own or using various types of robo-advisors. However, it will be necessary to set up either an investment account or an account on a selected platform that brokers the right ETFs (read also: Apps for investing in the stock market).

As for classic brokerage accounts with access to ETFs, many investors usually recommend XTB, mBank, or BOSSA. XTB deserves a special mention in this case, which does not charge any commission for trading ETFs.

However, when an investor does not want to choose ETFs himself, one can use WealthSeed, Aion Bank or Finax. These are intermediaries that have prepared automated tools that make it easier to select the right ETFs. It should be noted, however, that WealthSeed offers the greatest possibilities and can also be used as a traditional investment account.

Foreign ETFs by foreign brokers

The choice of ETFs by brokers is quite large. Where to buy ETFs? In the case of the broker XTB, the transaction costs are zero. However, if for someone such a choice is not enough, or they want to further reduce the cost of currency conversion, you can consider an account with a foreign broker.

In this case, investors have even more ETFs to choose from than in the previous options. Commissions with foreign brokers are on average lower than with Polish ones. As for commission-free ETFs, this type of offer may resemble that of the DEGIRO broker, which, under certain conditions and in the area of certain limits, also offers commission-free trading. It is worth remembering that even with small commissions, investing in ETFs is associated with the risk of generating losses.

The standard offer, which is not subject to limits, is relatively favorable. Below are examples:

• Exante – opening an investment account requires a minimum transfer of 10,000 euros. Outgoing transfers cost 30 thousand euros, and a fee must be paid if there is no activity for 6 months,
• DEGIRO – the broker offers attractive account terms are possible due to the fact that the broker earns money from, among other things, the fact that it lends securities of investors to other entities, as well as the possibility of executing orders outside the exchange – between its own clients. The risks associated with such activities are theoretically small,
• Interactive Brokers – in this case, a fee for low activity when the value of paid commissions is less than $10. There may also be costs associated with a low account balance and a fee for the low age of the investor – less than 25 years,
• Lynx – in this case the minimum deposit is 15 thousand PLN and withdrawal from the account is 50 PLN – only the first in the month is free (read also: Where to invest small amounts). If the balance amount falls below $1,000, as well as the absence of any transaction throughout the month, there is a cost for inactivity,
• DIF broker – if the trader has not made any payment for the whole, he will have to pay for inactivity 36 USD + VAT. With this broker, there is also a fee for holding securities.

As for currency conversion costs, they are low with Polish brokers, while they are often lower with foreign brokers.

Buying foreign ETFs through foreign brokerages – advantages and disadvantages.

Advantages include:

• A very wide range of choices – it is even larger than with Polish brokers,
• The entry threshold is similar to or lower with Polish brokers.

In turn, the disadvantages of such a solution are:

• More difficult tax settlement – the investor will not receive a PIT C, so he has to settle it himself, although sometimes foreign brokers help with this,
• Lack of IKE and IKZE accounts, i.e. the investor has no opportunity to save taxes,
• Foreign jurisdiction – in case of possible problems, the investor on limited possibilities to assert his own rights,
• Additional fees – although commissions and currency conversion costs are usually slightly lower, there may be other costs that will reduce the difference in base fees,
• English language – unlike investing in ETFs on the WSE, in this case, information on ETFs is available in English. In addition, the operation of the investment platform and communication with the client is often also in this language.

For whom foreign ETFs by foreign brokers.

It is worth knowing that, on the one hand, foreign brokers stand out for their wide choice and low costs, but there are also several disadvantages. Due to the lack of IKE/IKZE, it reduces the attractiveness of the Investment of long-term relatively small amounts. It is certainly dedicated to conscious investors who have concretized requirements for their investment portfolio, especially those with large capital or those who follow active investment strategies.

U.S. ETFs by foreign brokers

The United States is the largest market in the world when it comes to the development of ETFs. Stock ETFs have larger assets than actively managed funds. Some ETFs listed there are not available in Europe, such as the ARK Invest funds, which were very popular at one time. Here, management fees, like spreads and transaction costs, are the lowest in the world.

However, as of 2018, European investors are finding it difficult to access this market. Free investment in ETFs in the US is dedicated to professional investors in particular. As for retail investors, they usually can’t invest there at all, although there are brokers who have found a legal solution for this u offer access to the US market.

Professional investors can make investments in the US market without any problems, but it is very difficult to obtain such a status. At least 2 of 3 conditions must be met:

• The amount of capital – a minimum of 500 thousand euros,
• Transaction history – an average of at least 10 transactions per quarter over the last 4 closed quarters, for which the required value was 50 thousand euros each time,
• Professional experience – this is at least one year’s experience in the financial sector in a position that requires professional knowledge, which deals with transactions in financial instruments or brokerage services.

These conditions can only be met by a small number of people. As for Europe, there are at least 2 brokerages that have found a way, based on which they offer to invest in ETFs in the US – Exante and DIF.

As for the entry threshold, using the services of these brokers, you can make investments in the US without professional investor status, which is reserved for wealthy investors. However, higher capital is required for them as well. In the case of Exante, the minimum deposit is €10,000. As for DIF, the entry threshold is much lower, but due to other additional fees, it will not be a suitable broker for people with small investment capital.

The commission rate on trading ETFs in the US is only $0.02. However, it is important to keep in mind that there may be other additional fees that will eventually increase the overall bill for using these brokers.

US ETFs through foreign brokers – advantages and disadvantages.

As for the pros of such a solution, these are:

• The lowest fees that are charged by the funds and transaction costs,
• The largest selection of ETFs in the world.

On the other hand, the disadvantages of US ETFs are:

• More difficult tax return – the investor does not receive a PIT 8C, so the return requires a bit more effort on the part of investors,
• Usually higher entry threshold than with other European brokers,
• Foreign laws – in the event of a possible dispute, it will be almost impossible or severely hampered to assert one’s rights – litigation costs in the US are enormous.

For whom will US ETFs be renewed by foreign brokerages?

It will be the right choice for those who have a lot of capital. It will certainly be appreciated by investors who care about a wider range of choices, especially active investors.

What are the types of ETFs? Investing in ETFs for beginners

Having already known what they are and where to buy ETFs, it is worth learning more about this type of financial instrument. The basic division of ETFs is related to the assets whose valuations mimic a specific fund. For this reason, you can encounter ETFs for:

• bonds,
• stocks,
• commodities,
• cryptocurrencies,
• currencies (read also: Forex market and Online forex).

Within specific assets, there are different types, such as stock:

• Index ETFs – are designed to replicate stock market indices, such as the Polish WIG20 or the German DAX,
• Sector ETFs – these ETFs will select companies that operate in specific sectors of the economy, such as popular ETFs with exposure to technology companies. Thematic funds may also include, for example, renewable energy, robotics, etc..,
• Geographic ETFs – an investor can invest in an entire market from a specific country or even a “parcel of markets,” such as developing or European countries.

The next division concerns the way in which a particular ETF replicates a benchmark. Thus, one can encounter:

• Physical funds – in this case, the ETF buys shares of all companies that are part of a specific index in the right proportions,
• Static funds – this involves buying the securities of only the highest capitalized companies in a specific index,
• Synthetic funds – in this case, the fund does not realistically buy stocks, only directives that are based on them.

ETFs can be divided equally by how the dividend is distributed, namely:

• distributing ETFs – the investor receives dividends paid by companies, included in the basket of a specific fund. Many Polish investors do not choose to invest in ETFs of this type, due to the tax problems that are associated with the settlement of foreign dividends,
• Accumulation ETFs – in this case, dividends are not paid, they only increase the fund’s assets, and thus the value of investors’ units increases.

There are also price ETFs and income ETFs. These names are related to the type of index that a particular fund replicates. It is much better to opt for an income fund, as it mimics the price of an index that includes dividends paid by companies (read also: How much money can you make from stocks). When it comes to the long term, the difference between the income index and the price index can be as much as a dozen percent.

Where to buy an ETF? Shorting and leverage

It is worth knowing that there are also ETFs that allow you to play on the declines of certain indices. This is a helpful solution, especially when the markets enter a down phase. Funds that allow you to short the broad market are called inverse ETFs.

Leveraged ETFs are also risky, although interesting, solution. Because of the leverage built into a specific financial instrument, it is possible to increase the profit – or loss – on an investment.

Read also: Forex broker and Making money on forex

However, leveraged and inverse funds are not the right choice for novice players. They also generate higher annual costs than standard ETFs.

How accurate is the mapping of indices?

The goal of most ETFs is to follow the pricing of specific indexes. This may seem straightforward, but in practice, perfect reproduction of exchange rate movements can be quite a problem.

The difference in the mapping of a benchmark is designated as the mimicry error. This is a parameter by which an investor can determine the quality of a particular fund. The best ETFs maintain a charge error of 0.1%. However, sometimes there are daily deviations of many percent – especially during very high or falling sessions.

What influences the failure of ETFs to accurately replicate the indices on which they are based?

• Changes in the index structure – the composition of indices is not the same all the time. Still, their composition is constantly changing, which is related to fluctuations in the capitalization of certain companies. For example, in recent years, Pepco and Allegro joined the WIG20, and Tauron, among others, left. These changes mean that ETF fund managers may have temporary problems in order to milk their fund’s portfolio,
• Inaccurate replication – some ETF creators do not choose to buy shares of all the companies that are in a given index. Thus, it is not a physical replication, but more of a statistical one,
• Valuation hours – global exchanges operate at different hours therefore when a specific ETF operates according to a specific local time, it may take into account index valuations from a different hour than the closing time,
• Dividends – ETFs have very different policies that are related to dividends. Some of them pay dividends, while others include them in the unit valuation. Price and yield ETFs on the same index will show different results.

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How much does an ETF cost?

In addition to where to buy ETFs, it is also useful to know how much ETFs cost. When it comes to ETFs, be prepared for the following fees:

• Commission for the purchase and sale of fund units – this commission is charged by a specific broker, intermediating in the trading of ETFs. However, not in every case you will have to pay a commission, for example, XTB offers commission-free trading of ETFs,
• Annual management fee – although it is impossible to avoid this fee, it is not as much as you would have to pay for classic mutual funds. You should usually pay less than 0.5% per year for ETFs. However, there are also some that cost only 0.05%,
• Spread – the difference between the buying and selling price of units of a particular fund – on liquid ETFs, however, this difference is minimal,
• Currency conversion – when a particular ETF is listed in a foreign currency, there will be a currency conversion on the investor’s brokerage account, which can be in the range of 0.1-0.3%.

In comparison, you have to pay a lot more to invest in TFI funds. In addition to the annual fee, these institutions may charge a fee for buying and redeeming units. There are also various handling fees, etc. For this reason, the TFI fund fee can be as high as 4% per year. ETF funds generate much lower costs.

Currency risk

When deciding to buy ETFs in currencies other than PLN, you need to be aware of currency risks. This is not strictly a question of currency conversion, but of exchange rate movements.

When it comes to long-term investing, exchange rate movements of the zloty against the base currencies may not matter so much. However, when an investor decides to invest in the short term, with a strengthening PLN, the investor may lose on such a transaction, despite the fact that the rate of a particular fund has risen.

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Where to buy ETFs and how to account for taxes?

Accounting for profits in the case of ETFs is often quite a problem for investors. First of all, foreign dividends are a hassle. Each ETF may be registered in a different country with different tax rules. It can be a bit frustrating to calculate dividend earnings each year and fill out a PIT. To avoid it, an investor can:

• Opt for ETFs on the WSE, in which case the tax is automatically collected,
• Decide to invest in foreign ETFs that do not pay dividends, but include them in their valuation. Then you can avoid annual problems with the settlement of dividends. The such settlement will occur only when the investor decides to sell units of a particular fund.

Buying ETFs on IKE and IKZE accounts.

Where to buy ETFs? ETFs are typically used to pursue long-term strategies. So they are a perfect fit for retirement accounts. In this context, an investment account with Bossa or mBank, for example, which can be packaged with IKE or IKZE, may be a suitable choice.

Read also: Forex strategies for beginners

The biggest advantage of these types of accounts is the tax privileges. The investor does not have to fill out a PIT every year, and when he manages to reach retirement age, he will not have to pay the Belka tax at all. As for IKE, the tax will be 0%, and for IKZE there will be a 10% flat income tax.

However, when it comes to IKZE, the plus side is that you can take advantage of a full-year tax credit. The amount that was contributed to IKZE can be deducted from the base from which income tax is calculated.

Where to buy ETFs? Best ETF broker

ETFs are offered by various brokers – it’s worth checking out Saxo Bank’s ETFs, for example. There is also an interesting list of ETFs at XTB, which is the most popular broker in Poland, but not only. Less popular brokers also offer the opportunity to invest in ETFs, so there is certainly something for every investor.

How to invest in the stock market? Practical advice

Investing in ETFs, like other financial instruments, involves certain rules, which are worth learning early on to protect your capital and gradually generate profits (read also: How to invest in stocks).

Diversify your investment portfolio

While this may seem like a complicated concept to many, it simply means investing your capital in a variety of financial instruments, rather than just one, such as stocks. Thus, in the event that a certain group of assets begins to fall in price, an investor can conserve some capital by placing it in other financial instruments. What’s more, in the best-case scenario, if other assets start to rise, the lost portion can be recovered by them. The best investors are well aware of the importance of this principle and always apply it.

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Acceptance of investment risk

Every investor should understand that risk is inherent in investing and without it there is no stock market investment. It is worth understanding this beforehand and accepting the fact that at any time, even by following the stock market tips and rules, you can lose the capital you have. However, there are ways to minimize this risk, if only by using diversification. A little luck is also important.

Learning to invest

Investing in ETFs or other financial instruments is related to constantly expanding one’s knowledge in this area. An interested person should gain knowledge from various sources, such as books, ebooks, investing courses, etc. It is worth keeping up to date with all the investment news (read also: Forex training courses for beginners).

Investment strategy

One should never invest without any plan. Taking a specific investment strategy is the basis. You can base your investment activities on existing investment strategies, or you can create your own, relying on ready-made ones and taking selected elements from them.

Investing free money

The funds that an investor allocates for investment should be “free”. This means that he does not need them to meet other needs, such as current expenses. The investor has to reckon with the fact that the capital may be lost, so the loss of money should not adversely affect his household budget. Also, one should not borrow money without investing among friends or loan companies.

Investing according to your knowledge

Investing is an activity that one should go through in small steps, rather than throwing oneself into the deep end. First of all, you should invest in financial instruments about which you have knowledge. Only over time, after you have gained experience and skills, should you expand your investments to other assets.
ETFs are relatively safe financial instruments that you can use, for example, to diversify your investment portfolio.

Read also: World Stock Exchanges

ETFs on the WSE through Polish brokerage houses.

The simplest idea for investing in ETFs is simply to use those available on the stock market. Of course, the palette of choices is not large, but a big advantage is precisely simplicity, and in this case, it can be really cheap.

The available ETFs are not many, but not everyone has very precise requirements for what their investment portfolio should look like. Available ETFs include such as:

• 3 ETFs from French provider Lyxor,
• 4 ETFs from Beta ETF.

Other ETFs will also be available, such as the Beta ETF on the S&P500, as well as the NASDAQ100. These will be the first ETFs on the Warsaw Stock Exchange to be currency-hedged – USD/PLN.

For investors who feel unsatisfied due to lower diversification opportunities, it can be a consolation that often lower diversification means higher returns.
So far, commodity and bond ETFs have not appeared on the WSE. To take advantage of them, an investor would need to have a brokerage account with a house that gives access to foreign markets. If someone would like to supplement their investment portfolio with bond funds that are passively managed, they should consider inPZU funds. They are currency hedged, which is a big advantage of this type of solution.

As for brokerage commissions, the standard rate for trading ETFs is identical to that for stocks (read also: How to make money in stocks). In the vast majority of brokerages, it is 0.39%. However, there are brokers who offer ETFs much cheaper. Thus, it is possible to invest in ETFs even with small capital. Wanting to build an investment portfolio, which consists of several ETFs, is enough to have a capital of several thousand zlotys.

ETFs on the WSE – advantages.

Investing in ETFs on the WSE has many advantages, including:

• Low entry threshold – if an investor looks well, he can find really low brokerage commissions, and the minimum commission values are relatively low,
• Investing in PLN – ETFs on the Warsaw Stock Exchange are listed in PLN, there is no foreign exchange, so the investor does not incur foreign exchange costs,
• Polish language – information on the funds is available in Polish, so investors do not need to know English. Investment platforms of Polish brokers are also in Polish,
• Stock quotes – using Polish brokers, the investor has stock quotes available. A package with one best quote is usually free of charge, and packages containing more, are usually not relatively expensive. When it comes to foreign ETFs, quotation packages are much more expensive or not available at all,
• Easy tax settlement – using Polish brokers, settlement is very simple. At the end of the year, the investor receives a PIT8C, through which he can easily settle taxes,
• IKE/IKZE – ETFs on the Warsaw Stock Exchange can be purchased by investors under IKE and IKZE, thus saving on taxes,
• Polish law – using Polish brokers, investors are bound by Polish law, so they know where they stand. In addition, in case of a legal dispute, the matter will be settled by Polish courts. When it comes to foreign brokers, litigation costs would certainly be higher, and often it would not make sense.

Disadvantages of ETFs on the WSE

Investing in ETFs on the WSE also has some disadvantages. These are primarily:

• A small palette of choices – if an investor has very specific requirements for how he wants his investment portfolio to look, WSE ETFs may not be enough for him. However, if he doesn’t have high requirements, is interested in a quiet investment strategy, especially if he is starting out in investing, or when ETFs are only to be an addition to the portfolio, this type of offering may be sufficient,
• Liquidity – ETFs on the WSE are less liquid, not with the major foreign markets. Related to this is the fact that the differences between bid and ask are larger and may be an additional transaction cost. However, you can solve such a problem by not trading at the market price, but using limit orders. Instead of immediately buying at the market price, a trader can set a limit order a little above the best bid and then wait for one of the sellers to trade with him.

For whom to invest in ETFs on the WSE?

ETFs on the WSE is a suitable solution for people who have a small amount of capital, want to invest passively, on a long-term basis, and do not have precise requirements for the shape of their investment portfolio. This is a good option for beginners or for more advanced people for whom ETFs are a complement to their portfolio (read also: Basics of investing in the stock market). It is also worth remembering that the range of ETFs on the WSE will grow.

Foreign ETFs (European) through Polish brokers

Where to buy ETFs? Polish brokers are increasingly offering access to ETFs on foreign markets. In this case, the entry threshold is higher than on the WSE, but in return there is a larger selection of ETFs, allowing for greater opportunity to build a strategy and diversify a portfolio. Available primarily are such trading floors as:

• Frankfurt – Xetra,
• Paris – Euronext,
• Amsterdam – Euronext,
• Zurich – SIX.

In the case of Polish brokers, ETFs from Frankfurt and London dominate. Currently, ETFs on foreign markets can be bought, for example, at BP Santander Bank, BM mBank, DM BOŚ, DM XTB, and BM Pekao.

When it comes to investing in ETFs on foreign markets, commissions vary from broker to broker. It’s cheap at broker XTB – you can invest there without commission up to €100,000 per month.

As for BOŚ or mBank, the investor will pay more – 0.29% commission, and the minimums are several times higher than at the Warsaw Stock Exchange.

Commissions are not the only transaction cost associated with investing in ETFs on foreign markets. Having savings in PLN, there are also foreign exchange costs.
As for BOŚ and mBank, the currency conversion costs are relatively small – 0.1 and 0.2%. As for the best online exchange offices, you will have to pay more for currency exchange.

As for broker XTB, the currency conversion fee is 0.5% – quite a bit more. If an investor wants to save money, he can use online exchange offices. However, this only makes sense if the trader wants to invest in EUR since SEPA transfers are free. When it comes to USD, after adding the transaction costs of regular SWIFT transfers, one can often come out at the same, or sometimes worse, especially for small amounts.

However, when it comes to buying ETFs, currency conversion costs are usually one-time costs. When deciding to buy ETFs, the investor can make an automatic currency conversion, and when deciding to sell, the investor can set the settlement in the same currency, skipping the conversion back to PLN. In this way, subsequent investments can be made in the same currency, without any currency conversion costs. An exception to this rule is mBank’s eMaker account, which is maintained only in PLN. As a result, there is a currency conversion with each purchase and sale transaction.

ETFs on foreign markets through Polish brokers – advantages, and disadvantages.

Advantages of such a solution include:

• A wider catalog of ETF choices than in the case of the WSE,
• Greater liquidity and lower bid-ask spreads than on the WSE,
• Polish law, similar to the WSE,
• Ease of tax settlement.

As for the disadvantages, they are:

• A higher entry threshold, in addition to XTB,
• Currency conversion costs, which are lacking on the WSE,
• No listing packages or much more expensive than on the WSE.

For whom are ETFs on foreign markets by Polish brokers?

ETFs on foreign markets can be a suitable solution in particular for those who have higher requirements and a more concrete vision of their investment portfolio. They are suitable for both passive and active strategies. Those who want to invest passively, in a long-term manner, should have a little more capital.

Where to buy an ETF? There are several options, and each has its pros and cons, which you should learn about before making a decision.