Understanding ETFs in Ireland

An ETF, short for exchange-traded fund, is an investment fund that holds a collection of assets such as stocks, bonds, or commodities. Think of it as a pre-packaged bundle of investments that you can buy or sell on a stock exchange, similar to a single stock.

When you invest in ETFs, you’re essentially spreading your money across various assets, which can reduce risk compared to investing in just one company or asset. For example, if one stock in the ETF performs poorly, other stocks in the fund might perform better, helping to balance out the overall performance.

Many ETFs aim to replicate the performance of a specific index, such as the S&P 500, which tracks the 500 largest US companies, or the FTSE 100, which includes the 100 largest companies listed on the London Stock Exchange. By investing in an ETF that tracks this index, you’re basically investing in a small slice of each company in the index.

Investors can profit from ETFs in two main ways:

• By buying ETF shares at a low price and selling them at a higher price.

• If the ETF includes dividend-paying stocks, investors may receive dividend payments, which are cash distributions from the profits of the companies in the ETF.

ETF providers, on the other hand, make money through the fees they charge for managing the fund, known as the expense ratio. This fee is a small percentage of the fund’s total assets. ETF providers also make money from transaction costs related to buying and selling assets within the ETF.

In Ireland, some of the most popular types are equity ETFs that track major global investment markets like the S&P 500 or FTSE 100.

Here are some other types of ETFs you can invest in:

• Bond ETFs / Fixed-income ETFs: These funds invest in a variety of bonds, which are a type of loan that companies or governments issue to raise money. When you invest in a bond ETF, you’re putting your money into a collection of these bonds. You get the benefit from their interest payments and any changes in their value, without having to buy and manage each bond individually.

• Commodity ETFs: These funds invest in physical commodities like gold, oil, or agricultural products. They might directly own the commodity (like holding actual gold bars) or use financial contracts (known as futures) to track the price changes of these commodities. By investing in a commodity ETF, you gain exposure to the price movements of these commodities without having to buy and store them yourself.

• Industry ETFs: These ETFs invest in all the companies within a specific industry. For example, an industry ETF might focus on the technology sector, meaning it includes shares of many technology companies. If you believe a particular industry will perform well, an industry ETF lets you invest in that entire sector in one go.

• Inverse ETFs: These are designed to make money when the value of stocks or markets goes down. They work by betting against the market, so if the market falls, the value of the inverse ETF goes up. They can be useful for investors who expect a decline in the market and want to profit from it. However, they can be risky and are generally intended for short-term use.

Please note: Leveraged and inverse ETFs are highly complex, high-risk instruments that are generally unsuitable for long-term retail investors.

Leveraged ETFs aim to amplify returns by using borrowed money and financial tools. For example, a 2:1 leveraged ETF seeks to double the performance of its underlying index. If the index rises by 1%, the ETF might increase by 2%, but if the index falls by 1%, the ETF could drop by 2%.

In contrast, non-leveraged ETFs track an index directly. Their returns match the index’s performance exactly.If the index goes up by 1%, the non-leveraged ETF also goes up by 1%.

When choosing ETFs, you’ll also come across active and passive types.

• Passive ETFs: These track a specific index, like the S&P 500. They aim to match the performance of the index rather than beat it. Passive ETFs usually have lower fees because they don’t require a lot of management.
• Active ETFs: These are managed by professionals who try to pick investments that will outperform the index. The goal is to achieve better returns than the index, but this often comes with higher fees.

There’s no one-size-fits-all answer to this question; it really depends on what you’re looking for and your level of investing experience. ETFs are particularly popular among those looking for an entry point into the stock market. Seasoned investors sometimes prefer individual stocks to target specific companies they believe will perform well.

Ultimately, there’s no right or wrong choice—it’s about what works best for your situation and how comfortable you are with risk.

We’ve put together a table comparing the two:

Technically speaking, “index funds” can refer to both ETFs and mutual funds that track specific market indexes, like the FTSE 100 or the S&P 500. So, when you’re choosing an index fund, you’re actually deciding between two types of funds:

1. Index mutual funds: Bought or sold at the end of each trading day.

2. Index ETFs: Traded on stock exchanges throughout the day.

In Ireland, both index mutual funds and index ETFs are taxed the same way.

Looking ahead, upcoming changes in Irish tax law could soon offer a more streamlined framework for your investments. The Irish government is currently developing a tax-incentivised scheme known as the Personal Investment Account (PIA).

Under the proposed rules, ETFs can form part of your overall investment portfolio within a PIA alongside other qualifying asset classes. The PIA will be offered from 1 July 2027 and aims to simplify how these holdings are taxed over time.

The PIA will be completely excluded from Deemed Disposal and feature a €50,000 tax-free threshold, with balances over €50,000 taxed at 1% per annum regardless of whether the fund makes a profit or a loss.

Learn more about how the new accounts will work in our introduction to the PIA.

1. ETF trading commissions: When selling or buying ETFs, brokers or trading platforms often charge a commission. This cost can vary widely depending on the broker or platform you use.
2. Total expense ratio: This is an annual fee expressed as a percentage of the ETF’s assets. It covers the ETF’s management, legal, and administrative costs.
3. Bid-offer spread: This is the difference between the highest price a buyer is willing to pay (bid) and the lowest price a seller will accept (offer).

It can help to get in touch with a professional adviser to help you with these details and also manage tax returns.

If the tax aspect seems off-putting, there are alternative ways to manage your savings with potentially lower tax burdens or better returns:

• PRSA (Personal retirement savings account): These accounts allow you to invest in various funds with tax-free contributions and gains, depending on your age and earnings.

• High-yield savings accounts: If the 38% Exit Tax and 8-year Deemed Disposal rules seem overly complex, traditional savings offer a much simpler foundation for your money. Although you may still have to pay tax on your savings interest, the flat 33% DIRT rate and competitive returns on fixed-term deposits can offer a predictable way to grow your money, even if interest rates go down in the future.

If you prefer a lower-risk way to invest money, you might consider a high-interest savings account. With Raisin’s partner banks offering competitive rates on fixed term deposits, you can earn predictable returns with less risk. Deposits of up to €100,000 per person, per bank are legally protected by the national deposit guarantee schemes. Register for free today and start making the most of your savings.