ETFs versus index funds. Which is better

for European investors? Getting this

wrong can cost you real money. So, let

me use my 19 years of professional

investing experience during which I

invested hundreds of millions of euros

in these funds to explain the difference

between ETFs and index funds and to

reveal which is better in your European

country. What's more, I'll show you why

Jack Bogle, the creator of the first

index fund, warned investors against

using ETFs and in what ways that warning

can still be relevant today. All right,

so if you just want the country

bycountry breakdown, use the timestamps.

But if you're new to this topic, let's

start with a few important details that

many investors misunderstand. First,

what's an index? Well, as a 90s kid

growing up in Eastern Europe, I would

hear on the evening news that the Dow

Jones stock index went up or down for

the day. But to me, that was just an

abstract piece of information. Years

later, when I got my first job on Wall

Street, I learned that the stock market

is made up of thousands of different

stocks representing different companies.

On any given day, some stocks go up a

lot, some stocks crash, but most stocks

just kind of shuffle up or down a little

bit. So if you want to understand how

the overall market is doing, you can't

do so by looking at individual stocks.

The data is too messy. Instead, you look

at the market index. It's a single

number that represents the average level

of the entire market. For example, the

S&P 500 is an index of the 500 biggest

American stocks, the biggest American

companies. And right now as I film this,

the value of the S&P 500 index is

7,599.96.

Now, what does that mean? Well, that's

just a number. By itself, it doesn't

mean anything. What matters is how this

number changes over time. So, if I look

at the one month results, I see that

this number has increased by 5.5%.

Just because the index went up, it

doesn't mean that most stocks in the

American market went up. Because the

bigger the stock, the bigger the impact

that it has on the index. So what this

number really tells us is that the

average dollar invested in the US market

became roughly $15.

And this is where index funds come in.

An index fund is an investment product

that you can buy which before taking

away fees will give you the results of

the index. So if the S&P 500 goes up 5%

an S&P 500 index fund should also go up

5%. And vice versa. Now I've done many

videos about why index funds are a great

idea for regular people. The short

version is you are well diversified

which means you're investing in hundreds

of different stocks and that spreads out

the risk. Index funds are very low cost,

so that leaves more money in your

account. And index funds have a great

track record. They outperform most stock

pickers and active investors. But the

thing is, there are actually two

different kinds of index funds. There

are index mutual funds, which is the

first type of index fund originally

created by Jack Bogle 50 years ago, and

then there are exchange traded funds or

ETFs, first created in the '90s. Now at

the big picture level, the difference

between ETFs and index mutual funds is

largely cosmetic, but the user

experience is quite different. For

example, let's assume you want to invest

in the S&P 500. Now, when you buy an S&P

500 index mutual fund, your money will

go directly to the fund itself. And when

it receives the money, the fund manager

will assign you shares in the fund. And

then the fund will invest your money in

the shares of the 500 biggest American

companies. By contrast, when you buy an

S&P 500 ETF, you do so on a stock

exchange. The process is basically

identical to buying shares in Apple or

Microsoft or some other company through

your brokerage. So, when you think about

it, that means you don't buy the shares

from the ETF itself. You buy them from

another investor on the stock exchange.

And this can be counterintuitive. Your

money never actually reaches the ETF. It

is never actually used to invest in the

stocks of the S&P 500. But even so, the

price of the ETF will move up and down

almost perfectly in line with the

movements of the S&P 500. This happens

because of a technical mechanism called

arbitrage. I won't explain it here

because as a regular investor, you don't

really need all the details, but

basically you can depend on an ETF to

get you virtually the same identical

result as an index mutual fund. That

said, for European investors, ETFs and

index mutual funds are not equally

available or equally attractive. So,

let's explore country by country and

region by region which is a better

choice. We will address four aspects.

Availability, currencies, costs, and

taxes. For availability, ETFs are the

clear winners. You can buy ETFs in every

country in Europe. As long as you can

open a brokerage account and buy some

stocks, you can also buy ETFs. By

contrast, index mutual funds are much

more restricted. Basically, a fund is

only available in European countries

where the fund manager has filed the

paperwork to make it available. And

because filing this paperwork involves

costs and bureaucracy, in many European

countries, there are very few index

mutual funds available. Now, there are

some exceptions. In the UK, you can

access a wide selection of index mutual

funds. In Spain, these funds are also

popular for a tax reason that we'll

discuss in a moment. And there's a

decent selection of index mutual funds

in a few other countries such as Sweden,

Norway, Denmark, and Poland. But on the

whole, index mutual funds are much less

available across Europe than ETFs. Now,

let's look at the second differentiator

between ETFs and index mutual funds,

which is currency. ETFs are very

convenient if you make your money in

euros or pounds. Many ETFs are also

available in Swiss Franks. This means

that if you have one of these

currencies, you can buy ETFs without

having to exchange currencies or pay

exchange fees. Here's an important

warning. Buying an ETF in your local

currency does not remove currency risk.

If you buy an S&P 500 ETF in euros,

you'll still have exposure to the dollar

because the ETF will buy US stocks and

dollars. But it is very convenient to

buy in your own currency. Now, the thing

is not every country in Europe uses the

euro or the pound or the Swiss Frank. In

such countries, buying an ETF requires

exchanging currencies. If you do this

through your local bank, this is often a

total ripoff, costing you two to 3% or

more. Now, with a modern online

brokerage, exchanging currencies costs

much less. But with index mutual funds,

you can usually avoid the need to

convert currencies at all. If index

mutual funds are available in your

country, they are typically available in

the local currency. Next up, let's look

at costs. ETFs are some of the lowest

cost financial products in the world.

You can find ETFs which charge you

literally 0.05%

per year to invest your money in over a

thousand stocks all around the world.

That is basically investing for free or

close enough that it really doesn't

matter. By contrast, index mutual funds

tend to be a little more expensive here

in Europe, especially where the fund

provider is a local company. So you

might end up paying 0.2 or 0.3 or maybe

even 0.4% 4% per year, which is not

absolutely horrible, but over the years

it does add up. So, how do you find out

the fees before buying a fund? Well,

you've got to read the key information

document. This is a standardized EU

document, and in it, usually you can

find all the fees on the third page.

Now, these days, a good fee level for an

ETF or index fund might typically be

under 0.2% per year. Okay? And now let's

look at probably the single most

important factor when choosing between

ETFs and index mutual funds, and that is

taxes. To be clear, in most European

countries, it does not make any

difference for your taxes whether you

buy ETFs or index mutual funds. But in a

few countries, it does make a big

difference. So, let's go alphabetically

through the European countries where

this choice really matters. First up,

Bulgaria. ETFs have a big tax advantage

because if they are sold on a qualifying

stock exchange, no capital gains tax

applies. Denmark, certain distributing

index mutual funds benefit from a

taxation regime called the realization

principle. This means you only pay

capital gains tax when you sell. By

contrast, ETFs are taxed every year on

unrealized capital gains. Hungary ETFs

have an advantage because unlike index

mutual funds, ETF capital gains are not

subject to social contributions. Then we

have the Netherlands. Certain

distributing index mutual funds called

fiscal beleggings instelling funds have

modest tax advantages compared to ETFs.

Basically, they allow investors to

recover dividend taxes withheld by

foreign governments from the stocks

inside the fund. Slovakia ETFs have a

massive tax advantage. If it's the right

kind of ETF and if it has been held for

at least one year and is traded on a

recognized stock exchange, it can be

entirely exempt from capital gains tax

and health insurance contributions.

Index mutual funds don't have this

benefit. In Spain, index mutual funds

get better tax treatment than ETFs.

That's because with index mutual funds,

you can move your money from fund to

fund without paying capital gains tax.

And this is not possible with ETFs. And

that's it. In other EU countries, as

well as Iceland and Norway and

Switzerland and the UK, ETFs and index

mutual funds are taxed basically the

same. Now, there is one more mystery

that I need to explain. Why did Jack

Bogle, the creator of index funds, warn

investors against using ETFs? But before

I do that, let me make an important

point. When it comes to investment

taxes, we've only covered a small

fraction of what you need to know

depending on the country where you live.

Taxes impact what kind of investment

accounts you should use, when you buy

and sell investments, and much more. And

if you want to discover what is the

optimal way to start ETF or index

investing in your European country,

including all the local tax knowledge

and all the practical insights like how

to choose funds or which brokers to use

and so forth. I've got a step-by-step

training called the index masterass

which you might really enjoy. Click the

link in the description to find out

more. Okay, but why was Jack Bogle

skeptical of ETFs? Is there some kind of

hidden danger that we're not aware of?

If I have a little bias against the ETF

is because you may say and believe that

when trouble comes, you will not get out

in the middle of the day. The middle of

the day. I mean, come on. Market went

down 300 points in the middle of the

day. You got out and it went up 300

points at the second half of the day. I

mean, a lot of bouncing around. It's

meaningless. But in the long run, in the

long run, that's a nuance. A different

no difference whatsoever.

>> What Mr. Bogle didn't like is that ETFs

are traded on the stock exchange all day

long. If you like, you can buy and sell

them many times a day. And that means

it's easy to use ETFs for speculation,

for trading as opposed to responsible

long-term investing. But the good news

is this doesn't mean you have to use

ETFs for speculation. If you simply log

into your brokerage once a month and buy

an ETF, it's a perfectly fine long-term

investment. But there is another hidden

danger that I've seen trap many

beginning investors. You see, the most

reliable kind of ETFs, the kind of funds

that get the best results over the long

term tend to be lowcost broad market

funds. So, these are seemingly boring

diversified funds that invest in

hundreds of different stocks across

different regions and sectors. You buy

them and you hold them for years. But

today, there are over 4,000 different

ETFs available to European investors.

And many of them are not these boring

diversified funds. Instead, fund

providers are busy creating exotic or

speculative ETFs which are mostly

suitable for financial gambling like

leveraged ETFs which go up double or

three times as much as the market and

also fall more than the market or

inverse ETFs which go up when the market

goes down and vice versa. By contrast,

index mutual funds tend to be more

conservative. You can only buy or sell

them once a day, and there's less

temptation for fund providers to create

all these exotic products. That said, if

you know what you're doing when it comes

to ETFs, they are just as safe and

reliable as index mutual funds. Now, if

you live in Europe and want to discover

how to start ETF investing, I suggest

you watch this video next where I'm

going to walk you through the best way

to do so that I