What are Exchange Traded Funds?
An Exchange Traded Fund or ETF is a collection of investment assets. Some people refer to it as a pre-made collection of securities that offer investors access to a broad mix of investments such as equities (stocks), bonds and other such assets. It is very similar to a mutual fund, but and ETF is traded on the stock market, similar to individual equities. The attraction of ETFs to many people that use them is they offer broad risk diversification where many equities, for example can be included in the ETF. More importantly, for ETFs such as the S&P 500 or Stoxx 600, equities enter and exit the ETF depending on performance. Instead of buying individual securities, the individual investor can purchase shares of the ETF, which gives them instant ownership of all the assets within the basket. Again, the big advantage of an ETF is it can significantly help investors to diversify their investment options, spread their investment risk, and often they can also offer investors lower investment costs compared to traditional funds, making it easier access market investment options across a wide range of assets, markets and other sectors.
Just for some clarity, if we take the STOXX 600 ETF or S&P 500 (the former is European, the latter is US). The STOXX Europe 600 is composed of 600 leading public companies from 17 European countries, including multinational giants like Nestlé, LVMH, and Shell, as well as large companies from sectors such as industrials, healthcare, and financial services. Similarly, the S&P 500 comprises around 500 large U.S. companies across various sectors, such as technology, healthcare, and finance. Key companies include Microsoft, Apple, Nvidia, Amazon, and Alphabet. So instead of buying shares in each of the companies included in the ETF, one can buy a share of the ETF which gives them access to the share value performance underpinned by all of the companies included in the ETF.
Why is Ireland referred to as a leader in ETFs?
This comes down to the number of ETF providers that have been based here for a variety of reasons, including the favourable tax environment for those international firms that construct and offer them. But here, it often feels there is a disconnect between the significant presence of so many ETF providers and the reality on the ground for the retail end of the market. Firstly, it is not uncommon for so many people that are examining their investment options to have little knowledge or experience in ETF awareness, or use. But there are also some financial skills gaps where many people back away from ETFs when they learn about the cumbersome, and expensive rules that govern the retail end. Issues such as the deemed disposal, tax-free thresholds and the very significant tax implications on returns. When I refer to the financial skills gap, what I mean is that on the opposite end of the scale, there is a very significant amount of household savings sitting in low-yield (or no-yield) savings accounts. Very often, what families tell me is they would rather keep their money in a savings account offering little or no yield, despite the impact of inflation on its value than get caught up with an investment vehicle that requires payment of taxes on yields via the deemed disposal requirement even though no investment yields have been actually realised. In reality, there is a very favourable tax regime for the international firms that provide ETFs and a punitive one for domestic investors. But at the end of the day, there is a greater potential for positive returns via an ETF than leaving monies in a deposit / savings account paying little or nothing.
What are the current tax rules in Ireland in relation to ETFs and how do they compare to other countries?
Currently, the tax regime for retail investors is punitive. In simple terms, exit tax from an ETF is 41%. In the latest Budget announcements, it was revealed this will be nudged down to 38%. The tax-free threshold is just €1,270 (which is IR£1,000 in old money) does not apply. Plus, there is the added ‘deemed disposal’ rule. While Albert Einstein called compound interest the eighth wonder of the world, the deemed disposal rule in Ireland acts as a compound killer. This refers to the requirement to declare, and where applicable, pay tax on investment gains on the 8th anniversary of acquiring the ETF (which repeats every 8th year after the original purchase). This must happen, even if the individual investor has not sold the investment or realised any actual investment returns. Plus, to offer even more challenges to the investor, any future losses cannot be factored in later. In other words, on the 8th anniversary, an ETF could have risen by say 100% since being originally acquired. On declaration of the investment performance via the deemed disposal rule, the investor declares the results and pays their tax. However, if the ETF collapses in value in the following year, and results in a loss, there is no current tax provision to factor the loss.
Compared to other countries, Ireland’s tax system on ETF returns is high. For example, US, UK and Indian nationals incur tax at about 20% or so. There can be various tax rules on short-term and long-term investing but generally, when speaking to US, UK and Indian nationals, the higher end of tax is often quoted in the 20% range. Plus, many countries offer generous tax-free thresholds. The UK for example is almost two-and-a-half times what is available in Ireland.
Here is a working example of the difference:
Two brothers, one living in Navan Co. Meath and the other living in Newark, New Jersey. If both invested €40,000 for a 7-year period, assuming for 9% growth and factoring for management fees of 40 basis points in the US and between 50 and 100 basis points in Ireland, the net profit result (after tax) would be approximately:
- Brother in Newark nets between €25,298 and €26,878 depending on their tax situation – it ranges between 20% and 15% (depending on the term of the investment and their taxable income).
- Brother in Navan nets between €16,096 and €17,425 depending on whether he uses an online trading platform or a full-service broker service and factoring for 41% tax. There will only be a marginal improvement on the final outcome once the 2026 exit tax is in force.
In other words, the brother in Navan earns significantly less, even though EXACTLY the same amount of investment risk is being taken by both brothers.
It has been mentioned in the past that the tax rules could be eased in Ireland – has there been any progress in this regard?
In Budget 2026, there was a change to the exit tax. While a lot of people that pay attention to the issue were hoping for a reduction in line with DIRT or CGT, the exit tax on ETF’s remains stubbornly high. It’s a question that certainly comes up a lot, and it’s often been asked of me by those in their 20’s and 30’s who are paying attention. Often, the diversification and market access are very appealing to a lot of younger investors. They can be a means of building financial security, especially in an era when buying a home is taking a lot longer. So, people are wondering why the ETF route is so tax prohibitive. In fact, the tax on higher risk investments, for example cryptocurrencies are taxed at the lower rate of 33%. I think a lot of people that are looking for other means of building financial security are watching the space closely and asking why reform, which has been talked about remains on the long finger. And it’s not just the punitive tax (41% – which will be adjusted to 38%), it’s also the compound-killer deemed disposal (8-year rule declaration), and as it stands, the treatment of investment losses and of course, the tax-free thresholds (€1,270) should have been linked to inflation on investment yields in general or at least revised to reflect inflation every 2 years where the tax free thresholds apply. Again, not applicable in the case of ETF’s.
Revolut and other apps have made retail investing much easier and more attractive for the general population, especially young people. What sort of impact have these apps made on the industry?
There have been so many others. DeGiro, Bux, Trading 212, Trade Republic have all democratised the investment process in Ireland. They have also significantly reduced costs too. I have been a user of some of them for years and the reporting, access, alerting services provided are excellent. Today, it’s not uncommon for me to talk to a group of twenty-somethings that are really clued into investing, and all use the apps that I have mentioned above. But the big disappointment for so many of them is they feel they are being penalised by the tax system that appears to favour large international investment providers, over them, the small retail investor.
Other points
While ETFs offer broad market diversification, their very nature require patience. Buy and leave is one of the best investment strategies I have heard. Investment market rise and fall but over time, they rise. ETF’s capture the very broad market. The S&P index for example, since 1926 has risen by an average of about 9% per year. But there are times when markets can take a significant battering and valuations fall significantly. An ETF linked to the markets simple track the overall performance of the market, which in turn capture consumer sentiment and choice. Having a grounded understanding of those essential market dynamics and how ETFs play off those are essential to understanding the real power, and value of what ETFs offer.
Frank Conway is a Qualified Financial Adviser and Founder of MoneyWhizz.org, the financial education resource centre.
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