MiFID’s goal is to increase investors’ protection by establishing standards and rules for investment firms. At the beginning of 2018, a regulation made by the MiFID II or Markets in Financial Instruments Directive II took effect.
This regulation changes the traditional way of Europeans investing in US-listed Exchange Trade Funds. The European Union created MiFID II or Markets in Financial Instruments Directive II to protect European investors.
One of the protections regulated is the PRIIPs, or Packaged Retail Investment and Insurance Products. The category on these investments is extensive.
The regulation includes any marketed security with exposure to an underlying asset. To comply with this regulation, fund providers are mandated to make a standardized “key information document.”
This document will give investors details on the risk factors, costs, and loss potential of a fund. After two years, many United States Exchange Trade Funds issuers have agreed not to comply with this new regulation.
Some United States fund providers have created European equivalents of their United States funds. These are known as UCITS Exchange Trade Funds (ETFs). But these alternatives are not at their best.
These alternatives tend to have a higher expense ratio than United States Exchange Trade Funds. These alternatives are also less liquid than the US Exchange Trade Funds version. So now, this created a dilemma for European investors.
These European investors wanted to invest in the United States Exchange Traded Funds market. This rose to more than four dollars trillion in assets last November.
European brokers can also not provide Exchange Trade Funds that are not in compliance with MiFID II or Markets in Financial Instruments Directive II. The majority of European investors are left out of investing in United States funds.
And due to the PRIIPs, or Packaged Retail Investment and Insurance Products, the vast majority of European investors cannot access the United States funds. We also have a trap we call a United States tax trap to add to this.
This United States tax law contains plenty of traps for incautious investors based outside the United States. This tax law also applies to non-United States citizens residing in the United States.
This law, accompanied by the regulation that has been implemented, made investing in US funds unattractive for some European investors. There are some European domiciled replacements you can have for popular funds given these constraints.
So before you invest in a European domiciled alternative for a United States fund, these are the things that you should consider.
1. You need to consider the index that the original fund track
The index determines the strategy of the fund’s investment. You need to consider the index of the initial fund. If there are two funds and they track the same index, they should have the same investment strategy and similar return profiles.
So if two index funds are following the same index, the two funds should have a similar performance even though they have different domiciles. So if you want to know about the index, you can look for a European fund that tracks the same index as the original United States fund.
2. You have to learn to use a screener’s filter options
We have this exchange trade fund screener. It can search multiple criteria and multiple filters. This screener will make it easy for you to find an exchange-traded fund that corresponds to any requirements.
It could be a sector, country, asset type, provider, or index. All you have to do is know what you want to look for.
3. You have to know what the investment goal is for the fund
If you want a multiple index provider that will offer your indexes with similar destinations, you can find one. We have the FTSE All-World and the MSCI ACWI. These two are different indexes.
They also came from two different providers, but they have a similar goal. Their goal is to track stocks from all over the world. So you can find a European domicile fund with the same index but if you cannot find one, find a European domicile fund with a similar investment goal.
S&P 500 (SPY, VOO, IVV) – EU Alternatives SPX5, CSPX
The S&P 500 is a market-cap-weighted index of 505 large-cap US stocks. It represents approximately 80 percent of the united stated stock market’s market value. The S&P is the closest thing to a default U.S. stock index.
The S&P 500 was the first index fund’s standard and the first ETF. An S&P 500 ETF is an economical way for stockholders to gain diversified exposure to the U.S. stock market.
It also has been very unstable in 2020 amid the coronavirus pandemic and huge commotions in the global economy. Funds that track the S&P index are SPY and VOO.
SPY and VOO are the indexes that track the largest companies’ performance in the United States. 11 ETFs track the S&P 500 index domiciled in Europe.
Some S&P 500 ETFs:
MSCI World Index (URTH) – EU Alternatives IWRD
The alternative for the MSCI World Index (URTH) is the EU Alternative, IWRD. MSCI Developed market indexes are designed to consider a variation that reflects conditions across regions, market cap segments, sectors, and styles.
So if you are looking for a European alternative for the MSCI World index or URTH, you can use this European alternative IWRD.
Some MSCI World Index ETFs:
US Tech – EU Alternatives IUIT
The alternative for the US Tech is the EU Alternatives IUIT. US-TECH 100 index futures CFD, based on NASDAQ-100 index futures, is a basket of shares, including the 100 largest non-financial companies listed on the NASDAQ stock market. The index is traded as 'NQ.’ Try the European alternative of this named IUIT.
US Tech ETF: iShares U.S. Technology ETF (IYW)
Financial Select Sector (XLF) – EU Alternatives IUFS
The Financial Select Sector (XLF) alternative is the EU Alternatives IUFS. Financial Select Sector or (XLF) aims to provide investment results similar to the S&P Financial Select Sector Index by allotting its holdings parallel to the index's holdings.
XLF wishes to track the financial sector and distributes its fund in the banking, insurance, real estate investment trust (REIT), capital markets, diversified financial services, consumer finance, real estate management and development, and thrifts and mortgage finance industries.
If you are looking for an alternative to this ETF, try the European option of IUFS.
Some financial ETFs:
- Financial Select Sector SPDR Fund (XLF)
- ProShares Ultra Financials (UYG)
- Direxion Daily Financial Bull 3X Shares (FAS)
- Invesco KBW High Dividend Yield Financial ETF (KBWD)
MSCI Emerging Markets (EEM) – EU Alternatives EMIM
The alternative for the MSCI Emerging Markets (EEM) is the EU Alternatives EMIM. The MSCI Emerging Markets or EEM seeks to track the investment results of an index composed of large and mid-capitalization emerging market equities. If you seek an alternative for this, try this European alternative of EMIM.
In summary, it is not the end for European investors to still invest. There are equivalent alternatives for the exchange-traded fund or different united states ETF.
The regulation does not stop the European investors from doing their thing. It shows that Europeans are smart enough to maneuver this regulation and make alternatives to continue the European investors’ funding.
Remember the things you have to consider in choosing an option for the united states exchange trade fund. You need to consider the index that the original fund track.
You have to learn to use a screener’s filter options. You have to know what the investment goal is for the fund.
Some MSCI Emerging Markets ETFs:
- iShares Core MSCI Emerging Markets ETF (IEMG)
- iShares MSCI Emerging Markets ETF (EEM)
- SPDR MSCI Emerging Markets StrategicFactors ETF (QEMM)
- SPDR MSCI Emerging Markets Fossil Fuel Reserves Free ETF (EEMX)
- VictoryShares USAA MSCI Emerging Markets Value Momentum ETF (UEVM)