Where to trade ETFS?
ETFs offer real-time pricing and often allow for tax optimisation, but they suffer from the need to deal with a broker to make purchases and sales. For private European investors, using a brokerage platform (a “broker”) is usually the best approach, as direct access to a fund provider is either impossible or reserved for very large amounts. Fortunately, there are now very competitive offers for ETF investors who are paying attention.
Examples of brokers
There are many platforms to consider, but it is essential that they are properly licensed, have a good reputation and charge low commissions. The beginner investors can look at DEGIRO (a European broker from the Netherlands that also offers a good range of low-cost investments) or the US-based Interactive Brokers, which offers broader options with a very comprehensive platform. Most trades will cost you around USD 1 at Interactive Brokers, with comparable or no fees at DEGIRO. Neither broker charges custody or administrative fees.
Jurisdiction of the broker
The domicile of your broker is also important, with positive and negative aspects for each jurisdiction:
- In Europe, data protection is higher than in the US or the Far East. If these aspects are important to you, good conditions are available in Europe with DEGIRO ;
- US brokers may present a slight political risk with a consequent asset freeze and less respect for private data. However, the strength of their services and the broader offerings more than compensate for these distant disadvantages. In any case, US brokers such as Interactive Brokers serve European and Swiss clients through accounts opened outside the US (such as in Luxembourg or the UK – regulated by the FCA). They must therefore comply with the banking laws of those jurisdictions, even though the group is under consolidated US supervision;
- The comfort and security of having a Swiss broker generally leads to higher fees than the two examples given above as Swiss brokers are legally required to charge stamp duty and have more unfavourable pricing (especially in forex).
What would happen if the broker goes bankrupt?
If the broker fails, the rules that apply will depend on where your account is domiciled. In serious jurisdictions (including all of those mentioned above: US, EU and Switzerland), there is a segregation of assets for collective investment schemes in the event of the failure of the fund management company and your securities should be protected, as they will be segregated from the bankrupt estate.
Considering the case of problems or bankruptcy at the level of the custodian, a new receiving custodian can easily transfer the assets removed from a bankruptcy estate. Licences for the custody business generally require extensive supervision, making fraud less likely. Moreover, since the depositary business is not part of financial groups taking positions on their balance sheet, these entities have lower exposure to market risks: Apart from operational problems or fraud, a bankruptcy/reorganisation would presumably be due to a lack of profitability. It is more likely to anticipate and resolve such slowly materializing events than the effect of a sudden market turmoil.
The two providers mentioned (DEGIRO and Interactive Brokers) are excellent choices if you are domiciled in the EU or Switzerland. Feel free to compare the different options of the international brokers serving your jurisdiction, using these two examples as a reference. If you are already trading with your local bank, you may also want to compare rates and you may be surprised at the significant cost differences between these two illustrations and your “trusted bank.
In any case, pay attention to the fees for each transaction and securities deposit. Also, check all the information about your tax and financial situation and make sure that the companies are solid and have been offering their services for several years already before entrusting them with large sums of money.