Can European Investors Buy US ETFs? Is It Possible To buy US ETFs For EU Retail Clients?
Last Updated on October 7, 2022
Can European investors buy US ETFs? Is it possible to buy US ETFs for EU retail clients?
No, since 2018 EU residents can’t trade US-domiciled ETFs because of EU legislation that most US-registered ETFs have not bothered to deal with. For most EU traders and investors this means US ETFs are not possible to trade for the foreseeable future.
However, there is a “loophole” if you can register as “professional”.
Background: the PRIIP is the culprit
An EU/EEA regulation called MiFID requires brokers to categorize their clients as either “retail” or “professional” in order to determine the correct level of investor protection and transparency.
MiFID has thus prohibited EU-residents from investing and trading in US ETFs, like for example SPY, XLP, EEM, etc. The legislation was put into force in 2018 and as such, it has been in existence for many years already.
To my knowledge, no US ETF provider (?) has taken on the burdensome task to comply with EU laws.
This means you can’t open a new position in ETFs, just close already existing positions. There is currently no timeframe as to when (or if) ETFs will be tradeable again. Any orders are simply rejected if the issuer of the product has decided not to provide the KID required to distribute the product to EU/EEA retail residents.
It looks likely the rules are here to stay and thus you need to trade or invest in EU-domiciled ETFs.
What are packaged retail investment and insurance-based products (PRIIPs)?
The neat name of the problem is called Packaged Retail and Insurance-based Investment Product Regulation (PRIIPS). The regulation is intended to enhance understanding of these products through the provision of disclosure documentation. This documentation is referred to as the Key Information Document (or “KID”). The KID provides information such as product description, costs, risks & performance.
Interactive Brokers have issued a note about the regulation. If a product is eligible for trading, you need to check for KID.
However, there is a way to circumvent this (legally, of course) if you can be classified as “professional”.
In this case, the distinction between “professional” and “non-professional” is not the same as for market data purposes. When you order real-time quotes you need to answer a questionnaire to determine if you classify as “professional” or not. Professional means in this case a lot higher fees for the data. But this classification is by exchange designation.
To be able to trade US-domiciled ETFs the term professional is completely different:
You can reclassify manually to “professional” by application
It’s possible to be reclassified from retail to professional once certain qualitative, quantitative, and procedural requirements are met, at least at Interactive Brokers. This is based on two requirements: a qualitative one and a quantitative one.
The qualitative one is based on whether or not you have the expertise, experience, and knowledge to ensure that you are capable of making your own investment decisions and that you understand the risks involved.
The quantitative requirements are based
- You must have a balance of at least 500 000 USD including both positions and cash, or
- You have worked in the financial sector for at least one year in a professional position, or
- You have carried out trades in a significant size of a frequency of at least 10 per quarter over the last year.
Two of the quantitative requirements must be met.
If you believe you fulfill those requirements, you can make an application to reclassify to professional.
Ending remarks: Can European investors buy US ETFs? (US ETFs for European investors)
(A reader named Zaki made a comment in the comments section on how to circumvent the rules. We don’t know the legal basis for his recommendation – we are no lawyers.)
Unfortunately, it is very hard for EU retail traders and investors to buy US-domiciled ETFs. Very few can be classified as “professional”. This means that EU retail traders and investors can’t trade US-domiciled ETFs.
You can buy very risky single stocks, but not a less risky group of stocks like an ETF. Pretty absurd!
In Italy the situation is very illogical about the ETF. If you trade ETF you cannot compensate for your losses with your profits to avoid paying taxes on profits. Losses are considered to be of a different type from profits. Very very strange situation.
But can you trade US ETFs?
No I can’t. Italy is in EU too. We can only do the things worse. I read someone suggests to replace etf with cfd. What do you think about that?
I don’t trade CFDs, I stick to ETFs and futures. That’s where I have tested my strategies.
Your tax situation where you can’t deduct losses seems pretty bizarre 🙁
There is an alternative – open an account with tastyworks. As far as I understand, the regulation is applicable to brokers who have a presence in the EU such as IB. However, tastyworks is a US based broker with no presence in EU & it accepts clients from EU. I was sceptical initially but went ahead to test. I’m based in Helsinki and I opened an account with them and it all works! I can trade US ETFs and options without being classified as professional.
Thanks for your contribution. I’m no lawyer but I assume Tastyworks knows what they are doing? I will edit the article and make a reference to your comment.
Right, I’m not a lawyer either but I’m counting on the attorneys working for Tastyworks 🙂
Also, I noticed that SPY is available to trade directly through my bank, that’s the only exception. However, it’s not practical due to high commissions and fx loss.
In my opinion, a viable option in case a trader wishes to stick to IB, is to open a freezone company in Dubai and trade US ETFs via that entity. Although a bit more cumbersome, still much lower barrier than qualifying as professional trader.
Regardless, the content you have published has helped me immensely over the years, thank you!
Thanks for input.
What is the prize for a UAE freezone company and what about bank account?
Cost can vary depending on several factors, the most basic option can be around 8-12K AED (approx. 2200-3200 USD) per year. Once the entity is established, a bank account can be opened. Sending funds to IB & withdrawing works very well. Obviously, this setup costs a lot compared to Finland where a sole trader entity can be established for less than 100 euros, however when sizable trading capital is on the line, perhaps the tax advantage could outweigh the high cost of setup. My opinion only, not financial advice.
Thanks, I guess you need to go there to open a UAE account?
There are corporate service providers who could get it done with a power of attorney, I have used one for entity setup but not specifically for opening an account. Since I have family living there, so a bit easier.
Thanks for your info, Zaki.