A lot of you have been asking me to show you how to get started with buying ETFs in Europe, so it was about time for me to address this topic in more detail.
Here are some of the things we’ll be talking about in this article:
- We’ll start by looking at what ETFs are in the first place in case you have no idea and why I consider exchange traded funds to be an important part of my asset allocation.
- Then, you’ll get a look into my brokerage accounts, something that I haven’t shared publicly before.
- I’ll show you exactly how to buy your first ETF on Degiro, in my opinion the most cost-effective way to buy ETFs in Europe right now.
- We’ll also take a look at the difference between distributing and accumulating ETFs, which might be relevant depending on the tax laws in your country and your personal preference.
- And lastly, I’ll try to explain the differences between the two account types that Degiro offers when you sign up, to help you decide.
Update (December 20th, 2021): I updated this review, due to the introduction of Degiro Zero and some small changes to the fee model.
Please remember that none of this is investment advice, just my personal opinion based on my own experience as an investor.
My wife and I currently have close to 60% of our net worth invested in broad, low-cost ETFs compared to around 15% in P2P lending.
Just as a reminder, in case you assumed I was all-in only on P2P lending, simply because it has been the main focus of this blog.
What is an ETF & Why should I care?
ETF stands for exchange traded fund. We’ll be exclusively talking about stock ETFs, tracking large stock market indexes like the MSCI World or FTSE All-World.
These ETFs allow us to passively own a small portion of a large number of single stocks, covering most of the world economy and to participate in the long-term growth of the global market. All with minimal costs and while being able to buy or sell our ETF shares easily and quickly on exchanges.
My ETF Strategy – Keeping it simple
Here is our favorite ETF and the only one my wife and I buy on a regular basis:
The Vanguard FTSE All-World (ISIN: IE00BK5BQT80).
Note: We switched to the accumulating version at the beginning of 2021.
Via a single ETF, we’re able to invest into over 3.600 companies from all over the world. We’re not placing bets by buying single stocks of companies, which could always go bankrupt, costing us our entire investment. Instead, we’re counting on the world economy as a whole growing over time, as it has for the past hundreds of years.
Who knows if Apple and Microsoft will still be as relevant as they are today in a decade or if they’ll be replaced by other, more profitable companies. We also don’t know if the US will continue leading the market or if more and more successful companies we interact with daily will be based in other countries, like China or India.
And if more and more work can be automated by AI or done by machines instead of humans in the future, we want to earn a chunk of that increased profitability as well.
Ultimately, our goal is to get our share of the profits and growth of the world economy as a whole over time. To do that, the easiest, most cost-effective way I’ve found is by buying ETFs.
After all, trying to get better returns than the market is extremely difficult over a long time horizon. A lot of much smarter people than you and I have failed before.
Stock Market Volatility
There is one thing you should know: If you’ve never invested into stocks or ETFs before, you need to understand that prices don’t only go up, they also go down on a regular basis, as the market is volatile.
If you decide to start investing into ETFs, this needs to be a long-term decision. You should have a time horizon of 10 years or more. Based on over a hundred years of stock market history, we’re expecting returns of around 7% per year on our money long-term.
But this doesn’t mean we’re expecting to get exactly 7% per year added to our account balance. To give you a better idea, here is what this actually looked like over the past 14 years on the MSCI All Country World Index, which is very close to the FTSE All-World index I mentioned before:
Since December 31st, 1987, this index averaged 8,47% per year. But this average came with a lot of volatility. For example, in 2008, during the last financial crisis, the index was down 41,85%.
That’s why I’m telling you you need to treat this as a long-term investment, to get the average returns of the market. Don’t buy ETFs if you know that you would freak out and sell if the market drops by 20 or 40%. That’s part of the game and will likely happen again.
Now you might be thinking: “Well in that case, I’ll just wait for the next crash and buy in at a lower price.” That’s called market timing. A lot of people have tried and failed to do this in the past.
As a general rule of thumb, time in the market beats timing the market. Nobody can successfully predict a market decline, so I don’t try to either. I simply invest and if there is a correction, I treat it as a discount to buy more at a cheaper price.
Investing into ETFs for Retirement and to beat Inflation
For my wife and I, ETFs are an important part of our asset allocation and our long-term investments. We’re not planning to touch this part of our portfolio over the next 10-15 years or more. They’re part of our retirement fund for when we get old, as the current pension system in most European countries is clearly unsustainable.
Not only that, but we also consider our ETFs to be a good protection against higher inflation, in case the Euro or other currencies lose value for whatever reason.
In the past, the stock market has been a good hedge in periods of hyperinflation, as was the case in Germany between 1920-1924.
If you want to learn more about ETFs, here are some sources I highly recommend:
Flatex vs. Degiro
Here’s the deal, I’m a tax resident in Austria. We have a very complicated tax system compared to most other countries in Europe when it comes to investment funds like ETFs. That’s the reason why we currently have most of our ETFs with the Austrian broker Flatex, which automatically takes care of the taxation for us.
The downside of my Austrian broker however are the high fees of 5-8€ whenever I want to invest more money right away. Luckily, monthly saving plans are only 1,5€ each.
Meanwhile on Degiro, I could buy my favorite ETF once per month (+ whenever I have over 1.000€ or more to invest), commission-free (make sure you check the exact conditions). Those savings definitely add up over time.
Degiro is one of the best options for European investors to buy ETFs, as they have some of the lowest fees on the market and a total of 200 ETFs can be purchased commission-free (check conditions) every month.
Degiro is a licensed, regulated investment firm, based in the Netherlands. As such, they’re supervised by the Dutch Authority for Financial Markets and the Dutch Central Bank.
Your assets are always held in a separate entity, which is standard practice across investment brokers. That means they’re separate from Degiro and can’t be touched in case they would ever go bankrupt.
Basic vs. Custody Account
When you open an account, Degiro asks you to choose between two account types: Basic and Custody.
I will only look at the main differences between these two accounts, at least from our perspective as ETF investors.
Cost-wise, the two accounts are very similar for our needs.
Both accounts are completely free to open and there are no maintenance fees.
Only after you started investing on Degiro and you have your first ETF on your account, Degiro charges 2,5€ per year as an exchange connectivity fee for every stock exchange you buy or sell your ETFs on. If for example like me, you’re only buying free ETFs via the Euronext Amsterdam exchange, you’ll only pay this 2,5€ fee once per year.
Here is the most notable cost difference between the Basic and Custody account, so that you can decide for yourself which one to choose when you sign up, based on your investment strategy:
- No fees on dividends.
- That means you pay no fees if for example you receive a 50€ dividend from your ETF with a basic account.
- Dividend processing fee of 1€ + 3% of the dividend, but no more than 10% total of the dividend (which matters in case the dividend is small)
- That means you pay 1€ + 1,5€ (3%) = 2,5€ in total on a custody account when you receive a 50€ dividend from your ETF.
Just looking at that, you might assume that choosing a basic account is a no brainer, but…
The main difference between the two Degiro accounts
- Shares you own can be temporarily lent to third parties, if they’re able to provide 104% of the share value as collateral.
- There is no share lending whatsoever with a custody account.
These are Degiro’s measures to minimize any risk related to share lending on basic accounts:
- As I mentioned, the clients assets are always held in a separate entity, so they can’t be touched in case of Degiro going bankrupt.
- Degiro always requires a collateral of at least 104% of the share value before any lending can take place, to minimize risk
- Degiro itself always acts as the counter-party if shares are lent out – that means that if for whatever reason the borrower’s securities are unable to cover the value of the borrowed shares, then Degiro makes up for the difference with its own funds.
Nonetheless, here is the very unlikely worst-case scenario with a basic account, as explained by Degiro:
Damage for a client whose Securities are Lent therefore arises only at the moment when both the borrowing party and DEGIRO are no longer able to meet their obligations (i.e. are bankrupt) and the value of the security has fallen or the value of the Lent Securities has risen. The amount of the damage is limited to the difference in value between the Lent Securities and the security provided by the borrower.
Now, the other question is how likely our specific ETF shares are to be lent out, as I don’t think there’s a lot of demand for borrowing shares for our broad worldwide index funds, compared to single stocks.
But this still means that a basic account carries some counterparty risk, limited to the amount of the difference between the collateral and the current share value, if both the borrower and Degiro were to go bankrupt at the same time.
If you want to completely avoid the possibility of any of your shares being lent out at any time, as you don’t like the idea and you want to eliminate all counterparty risk, choose the custody account when signing up to Degiro.
In the end, the extremely low transaction fees on Degiro in my opinion more than make up for the small dividend fees you would have to pay with a custody account. And if you’re only buying accumulating ETFs, meaning ETFs that don’t pay out dividends and instead reinvest them into the fund right away, then you’re not paying any dividend fees in the first place.
If however, you think the counterparty risk is negligible and extremely unlikely, you prefer dividend paying ETFs and stocks and you want to avoid paying any fees on dividends, choose the basic account on Degiro.
By the way, if you have one of the two account types already and you want to switch to the other one, you’re able to register a new account on Degiro and can then ask them to transfer your shares to the new account.
Update (Dec. 2021): It seems as though Degiro removed the Custody account option for new accounts. I don’t think that’s a big deal, I’m using a basic account as well.
How to buy your first ETF on Degiro
Alright, it’s about time I show you how to buy your first ETF on Degiro.
I’ll use the Vanguard FTSE All-World (ISIN: IE00B3RBWM25) as an example, one of Degiro’s commission-free ETFs.
By the way, sorry about the German text.
1. We’ll start by copying the ETF’s ISIN (IE00B3RBWM25) into the search function:
We want to make sure we’re buying our Vanguard FTSE All-World ETF on the Euronext Amsterdam Exchange (EAM), as that is the exchange that’s mentioned on the commission-free ETF list.
2. Next, we’ll click on the green Buy button
3. Here is where we can place our order, and choose between limit or market order.
- Limit stands for the amount we’re willing to pay for each share of the ETF. After filling that out, we can enter the amount we’re planning to invest under Amount (€). It will then automatically calculate how many entire shares we’re able to buy with that amount, and after the order has been executed, we’ll have 76,74€ left in our example, using the numbers above.
- Market can be a good choice if you just want to buy the shares as quickly as possible, at whatever the current cheapest price is on the market. Once again Degiro only buys entire shares, so you’ll likely have some cash left over on your account.
You can then set the validity of the order to be either until the end of the day or with no timely limit, so that it will be executed whenever it either hit’s the price you set (limit order) or when the market opens again (market order).
4. As a last step, you need to click on Place Order and confirm the details of the order in the next window. That’s it!
I also recorded a new video guide recently, you can see it here.
Distributing vs. Accumulating ETF – Some things to consider
Now that you know how easy it is to open a brokerage account and to buy an ETF, we need to talk about a less exciting topic for a moment, taxes.
Unlike in Austria, in most countries in Europe the taxation regarding ETFs is pretty straight-forward. You pay taxes on potential profits when selling ETF shares as well as on dividends you receive.
In that case, it could be advantageous to invest into a reinvesting (accumulating) ETF, which automatically reinvests all the dividends into the fund (ETF) instead of paying them out to you. That way you could let your investments grow tax-free for a long time and you’re only paying taxes on profits when you’re actually planning on selling some of them, for example to cover your retirement expenses.
Just please make sure you do your own research on the topic so you know what tax laws apply to your own specific country.
While distributing ETFs may be less tax-efficient, it’s nice to have dividends coming in on a quarterly basis. Seeing that cashflow increase over time can be motivating to keep investing and to stay invested, no matter whether the market is up or down at the moment. I think this could be a powerful psychological factor for many investors.
Hopefully I was able to provide you with a bit more insights on what ETFs are, why they are an important part of our asset allocation and gave you an idea on how you can get started with diversifying your portfolio by adding ETFs.
I’m really enjoying the ability to buy my favorite ETF, the Vanguard FTSE All-World commission-free on Degiro. I can do that once per month plus whenever I want to invest 1.000€ or more (the exact conditions for more details).
Those savings certainly add up over time, especially when you compare them to what most other European brokers charge for orders.
Before you take off, I’d love to know in the comments if you own any ETFs as well, or if you’re completely new to ETF investing.
Also, make sure you check out my newest article and guide: ETF Investing for Europeans in 2022.
Visual Summary (Sketchnote)
After I published the video, my beautiful wife Zsófia was so kind to create a sketchnote to summarize the content. You might find it useful:
Video of the article (Outdated)
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