Seeing someone using TER? Tell them they’ve got it all wrong! Investing has never been easier – How to choose ETFs

Investing has never been easier - How to pick the perfect ETF

how to choose ETFs

Did you know that some ETFs beat their benchmarks consistently? I recently received a comment from a reader related to this topic. He was somewhat confused about ETF fees (spoiler alert – forget about TER that everyone is using!)

This came at a time when I also received questions about the four currency types that are not very intuitive and I thought of using this occasion to make a deep dive into European ETF basics that may hopefully benefit some of you (US Investors may also get some interesting insights)

If you read about Financial Independence Investing from a US source you know how easy it is to buy Index Funds in North America (select two Vanguard Funds – US Bonds & Global Stocks… sit back, relax and enjoy the Passive Income!)

And yet Europe and the UK are a bit of a different ballgame – especially if you want to have a little bit of control of your portfolio

For instance, Vanguard doesn’t even cover 5% of the market in Europe

Europe has always been fragmented but despite all the below considerations, it’s never been easier to invest  if you know the basics

By doing some initial research you can avoid life-long fees charged by various advisors, which may make you substantially wealthier in the long run (check a simple calculator to understand what even a 1% fee can do to your portfolio)

Choosing ETFs includes deciding which ETF provider to select, how Fund characteristics play a role, making sense of which currencies matter most, navigating fees, dividend reinvesting and tax implications. Here’s what you need to know to pick the right ETF

How to choose an ETF in 6 Easy Steps

#1 - Which European ETF provider is Best?

Key European ETF providers by Assets under Management

The US big three Asset Managers – BlackRock’s iShares, State Street SPDR and Vanguard are all present but local players have also a strong footprint – DWS Xtrackers, Société Générale’s LYXOR, Amundi ETFs or UBS ETFs to name a few

As of Q1 2019, total assets of European ETFs exceeded 750 bn out of which:

  • BlackRock’s iShares dominates the European Market with a market share of c. 45%
  • DWS’ Xtrackers managed roughly 12% of all assets
  • Société Générale’s LYXOR is the third largest in terms of assets under management  with c. 9% Market Share
To understand how different and fragmented Europe is imagine that two out of three US’ TOP 3 –  Vanguard and State Street (SPDR), currently don’t even exceed 5% of the market. This is important if you initially read about Wise Money Investing from a US source given the (often justified) preference for Vanguard across the pond
Key European ETF providers by Count

Now that we know which providers to choose from (Vanguard despite its small size in Europe is still a great option), let’s look at other considerations for a European Investor looking to buy International Bonds hedged to his domestic currency (EUR) – the same checks apply to Equities

  • Given the need for currency hedging a Bond ETF is a good example to illustrate all the checks before buying an ETF
  • I selected one of the candidates for a typical long term portfolio (e.g. Financial Independence, Retire Early goals) – the Xtrackers II Global Government Bond UCITS ETF

Anatomy of an ETF - Key Considerations

#2 - How do I find a European ETF?

Ways to look up an ETF

In most cases you can use the name of the Fund or its ISIN to search for the fund with your stock broker:

  • FUND NAME – this is the easiest way to look up  a Fund, type the first letters and the ETF will likely show up
  • ETF CLASS – Once the fund shows up select the ETF Class. This is important and you will often find clues about income treatment and currency hedging here (more on that, below)
  • ISIN – The second best way to look up a Fund. It is specific to each ETF globally. The first two letters stand for the domicile of the fund (e.g. LU0641006456 for Luxembourg). It’s convenient, because ISINs for ETFs with multiple currencies will have the same ISIN
  • There are two exceptions to the same ISIN rule, though. It’s not the case when the ETF is currency-hedged or/and because some distribute income while other may reinvest (aka accumulating) which case ISINs will differ (as below)
The XTrackers ETF has multiple classes with currencies to which it's hedged and income treatment (Dividend vs. Reinvesting)
However, there are other methods of finding an ETF, even though you probably won’t need them:

  • TICKER (also called TIDM) – is comprised of a few characters linked to a specific to the exchange. In the example above you can see an indicative ticker for our selected Class (1C EUR). The problem in Europe is that since the same Fund can trade on multiple stock exchanges they might have different tickers as well so it may not always be easy to find it that way. This one in particular has two tickers depending on whether it’s traded on Italian Stock Exchange (XGSH) or German (DBZB)
  • SEDOL – a unique instrument identifier allocated by the exchange (this is not the most frequently used)

#3 - Do ETF Size and Inception Date matter?

ETF Size Matters

Look out for your the size of your specific Fund– it should be at least 100 million, ideally above €250m to reduce risk of the fund closing e.g. due to commercial reasons 

Over 100 ETFs close each year. I have personally experienced it and since it was a busy period in the office I was caught off guard at that time and I didn’t sell before it closed

The proceeds of ETF liquidation were ultimately paid but it took a few weeks before hitting my account which is always an opportunity cost

How do I determine Fund size?

Size of ETF Classes with different currencies and income treatment
example of fund size consideration when choosing a european ETF

When you have pre-selected a fund, review its documentation and look for overall size, Class size may be misleading e.g. for a Swiss investor the 80mm size may seem small

Total Assets under Management of the Fund

However, when looking at the overall size it is close to 2.5bn and one of the largest International Government Bond Funds

Should I check ETF Inception Date?


Again, closure risk is part of the risk of being an active market participant and new ETFs always have more commercial risk than large, more established Funds with long track record

#4 - Which ETF currencies should I pay attention to?

Let’s use the same example as above -with an ETF investing in Developed World Government Bonds as explained here

You should pay particular attention to Assets Currency and Currency Hedging

importance of currencies for European ETFs

1. What is Underlying Assets Currency?

Example of currency exposure for a Global Developed Government Bond ETF
example of currency exposure in european bond etf
Click on the picture to read about choosing an International Bond ETF

The Underlying Assets currency has a major impact on the ETF’s return

The Underlying Assets currency applies at the overall Fund level. For example, the Xtrackers Global Developed Government ETF invests in Developed World Government Bonds and the major countries for those Indices and ETFs are USA, Japan and France 

For each of them the underlying asset currencies are primarily the USD, JPY and EUR but also other countries with lower exposure in the ETF

You will be exposed to fluctuations of those currencies, unless you decide to hedge

2. What is Currency Hedging?

Hedging can have a major impact on performance (example of difference in return for UK Investor holding a S&P 500 ETF)
ETF currency risk - S&P 500 in GBP - One-year trailing annualized return difference between hedged and unhedged ETF UK Investors Bogleheads
Click on the image to understand more about Currency Hedging in ETFs

Outside of Underlying Asset Currency this is the second most important currency aspect to pay attention to

Currency hedging applies at the ETF Class level. As a European Investor, in most cases you will have the option to hedge the underlying currencies – as of September 2020, there are over 550 currency hedged ETFs in Europe

If you hedge the Asset currency, the Asset Currency risk (and performance) becomes largely irrelevant

Is currency hedging beneficial? It depends on your time horizon and whether it’s Equities or Fixed Income as I have explained in detail here

In the example above if you are a European Investor and choose the EUR Hedged Class you will be earning income in EUR from International Bonds without taking any currency risk

In this case the currency column shows your effective currency exposure after hedging (it happens to be the same as the Trading currency)

3. What is Trading Currency?

The Trading Currency does not change the currency risk  you are taking by investing in the underlying assets and thus, this currency also doesn’t have any influence on the overall ETF performance

The Trading Currency applies at the ETF Class level. Is it the currency listed on the Exchange in which the ETF is quoted with your Broker. It’s also usually (depending on the broker) the currency you will see in your broker account when you look at your holding

You are not holding or exposed to this currency in any way. At purchase you exchange your own currency to buy the ETF Trading currency (in order to buy the Fund) which gets exchanged against the Fund Base Currency. However, ultimately the Fund buys the underlying Assets so all the intermediary currencies don’t matter much. The opposite happens when you sell

In a nutshell, you can largely ignore the Trading Currency

However, it may be marginally beneficial if the trading currency is your own currency but it’s not mandatory if you don’t have that option. The reason for that pay an additional (usually small) exchange rate conversion fee at the time of purchase and sale if you don’t buy in your own currency. As you can see below, there is ample choice in major European currencies so you will probably have the option to use your own currency as Trading currency

Relative number of European ETFs listed in 4 Major Trading currencies

4. What is Fund Base Currency?

The Fund Base Currency simply refers to the currency that a fund reports in and not the currencies of the underlying securities which you are exposed to

The Fund Base Currency applies at the overall Fund level

Since the Global Government Fund has classes in different currencies and some are distributing dividends while others are reinvesting them there are various available options for investors

However, the Fund Manager must consolidate all information and will report in a unified way (usually using the benchmark currency as reference). I this case everything is reported in EUR (but for a large proportion of Global funds this currency is USD and that shouldn’t stop you in any way, as European Investor, from choosing such Fund)

You can largely ignore the Fund’s Base Currency, since it’s irrelevant to the performance of your investment 

Note that for distributing funds dividends are distributed in the fund currency. Your broker will convert the distributed amount into your currency for an additional conversion fee

#5 - How much do ETFs cost?

One of the main advantages of passive investing is its low costs

However, there are certain misconceptions about the true cost of an ETF which is not the TER or OCF

Breakdown of Provider-related ETF Costs

The TER (Total Expense Ratio) or OCF (On-going Charge Figure) is only the visible part of the total (ETF Provider related) cost and includes trading costs and management expenses

ETFs have been undergoing significant on-going costs’ compression. In fact, some of the ETFs in the US are sold at no cost 

Downhill Ride - On-going Costs for ETFs in Europe

Average On-going Fees for Equity Funds

Equity ETF Fees have been on a downward trend over the past decade but vary depending on the complexity of the ETF and the underlying Market (e.g. Emerging Markets still require a fee premium compared to Developed Markets)

Average On-going Fees for Fixed Income Funds

This holds true for Bond ETFs as well, even though Global Government Bond and Aggregate ETFs (nor represented in the data from Morningstar) are still a bit more expensive

As I mentioned in a comment related to all Global ETFs you should think twice before paying more than 0.4% per year

Looking at TER? Tracking Difference is the True Cost of holding an ETF!

Understanding Less Visible Costs - How big is the gap between On-going Costs and Tracking Difference?
definition of tracking difference

The next question then is – what is the less visible part and how can I track it?

  • The less visible part has not been formally agreed with the European Union, hence it’s not standardised but must be taken into account. It has two components: costs and revenues
  • Less visible costs that may not be directly shown include Rebalancing or Swap Costs (for Synthetic ETFs
  • ETFs can have side hustles, too.  And side hustles can make a lot of money! The less visible part also includes some additional revenues that may increase the ETF’s performance due to Security Lending (e.g. for the Xtrackers Global Government Bond ETF 70% of revenues go directly into the Fund)
  •  All the above items add up to the Tracking Difference which is the difference in return between the Benchmark and the ETF
Let’s have a look at the EUR Class performance during the past 10 years
Evolution of Benchmark and ETF Prices over the past 10 years
index fund tracking difference over time

There is a certain lag in performance that grows over time due to fees and other costs

The Fund advertised TER is 0.25% and looking at the track record the Fund has done a good job at keeping that ratio

In a nutshell, the Tracking Difference has been consistent with the TER implying no net hidden costs i.e. less visible costs and revenues evened out over time with

Difference in Price over the past 10 Years
tracking difference example for a fixed income etf

As you can see in the table above, the Benchmark has returned 3.23% per year over the past decade vs. 2.98% for the ETF implying a Tracking Difference of c. 0.24% just below the TER of 0.25%

Monthly tracking wasn't always smooth...

I haven’t got any knowledge of what happened over that time period but an outside-in look at the data makes me think that the first 5 years there were slightly less consistent while some event (or data issues) caused tracking discrepancies in 2015, swiftly corrected in the next months. More recently, the index replication was very accurate 


... but remained consistent in the long run
tracking difference - cumulative loss to benchmark model vs reality etf

I had a look on what would have been an ideal tracking with 0.25% cost and what the ETF actually did.

You can see that the tracking does remain consistent over a longer time period

What I didn’t mention so far is the concept of Tracking Error that is the deviation of the difference in returns. In this case the Tracking Error is 0.1%, which means that over long periods of time you will get a 0.25% annual drag on performance and +/- 0.1% of typical deviation (assuming future tracking will remain consistent with the past which is never certain)

Tracking Difference vs. Tracking Error

If you primary goal is the long term performance of the ETF I’d focus on Tracking Difference but if you are buying and selling ETFs  frequently you may also have a look at Tracking Error 

Be (a bit) more tolerant with Bonds

I’d have low tolerance with Tracking Difference for plain vanilla (very common) products like the S&P 500 Index or main European Indices

However, I would be slightly more tolerant with Fixed Income ETFs

Bonds are much less liquid then Stocks. According to Citibank of the 21,175 publicly registered company bonds in the US in 2018 only 246 traded daily which means Bonds are less liquid than Stocks that trade continuously

There are also other issues related to replicating Bonds and replication relies a lot more on sampling techniques (see below)

Forget fees, ETFs can outperform benchmarks

In red, ETF outperformance vs. benchmark after taking into account TER and net revenues
example of tracking difference for European ETFs - Euro Stoxx 600

Doing my analysis requires access to Index data and some time for the analysis

A rough and simple way around it is to plot multiple ETFs using such tools as (or use their metrics). The best performing ETF would be a good proxy for a Fund with the best Tracking Difference

German speakers can also directly leverage (you need to understand their methodology, though)

It is not uncommon for some ETFs with higher TER/OCFs to outperform lower TER/OCF competitors using additional returns such as securities lending – e.g. Equity ETFs frequently make money and in fact outperform their benchmarks

Apparently expensive ETFs (high  TER can in fact yield the highest net return – yes, negative fees!) can end up being the best Funds

 When comparing funds, make sure:

  • Funds you are comparing have the same underlying benchmark
  • Funds have the same hedged currency
  • The length of the analysis is at least one year (longer is better) 

Tracking Difference vs. Total Cost of Ownership

Your personal costs matter, too

Remember, these are ETF Provider related costs and still exclude external fees and taxes you may incur that are specific to your situation e.g. Broker platform fees and commissions, Bid/Ask Spread on purchase and sale and any taxes

Ultimately, the most relevant cost figure is the Total Cost of Ownership (TCO) that includes ETF Provider Costs and any external costs and taxes

#6 - ETF Provider Methodology, Taxes & Stock Exchanges

1. ETF Replication Methods

Full replication vs Sampling
  • Physical (full replication) – ETF holds positions in all companies as detailed in the index. This method is employed if the underlying assets are readily available, reasonably small in number and do not significantly alter (e.g. the 100 shares listed on the FTSE)
  • Physical (sampling) – ETF holds positions in a relevant subset of the companies detailed in the index. The subset is chosen so that the performance of the fund matches the performance of the index as closely as possible. This approach might be used if the benchmark contains a large number of assets which change frequently (e.g. the MSCI World Index, with more than 1,600 constituents)
  • Synthetic – ETF uses a financial derivatives to replicate the performance of the index to investors. Be aware that these ETFs do not hold the underlying positions (I tend to avoid these Funds)

2. ETF Domiciliation - Ireland vs. Luxembourg

Count of European ETFs by domicile
european etfs domicilation breakdown
  • It’s worth knowing the registered home of your ETF to avoid tax complications later
  • In Europe, most ETFs are domiciled in Ireland or Luxemburg, for various tax breaks reasons
  • This website does not provide tax  guidance and domiciliation is an individual tax related topic (e.g. Dutch Investors may fall outside of these two cases)
  • You know where an ETF is domiciled by looking at the first two letters of its ISIN e.g. LU0641006456 for Luxembourg
  • Irish-domiciled ETFs benefit from the US/Ireland double taxation treaty, which reduces standard withholding tax rates on US stock dividends from 30 to 15 per cent and – may prove beneficial if your ETF invests in US Assets
  • Luxembourg-domiciled ETFs are subject to the full 30 per cent tax rate for US Assets. However, Luxembourg does not charge any other taxes such as capital gains or dividend for non-resident investors of Luxembourg domiciled funds (you residency country still does, though) – depending on your tax residency this may be beneficial for non-US Assets
  • Obviously, if you buy Worldwide exposure US will represent the largest allocation
  • For most other countries Ireland and Luxembourg have similar withholding tax rates and where they haven’t, it would not matter much considering weights of those countries in a World ETF

3. ETF Income Treatment - Reinvesting vs. Distributing

The majority of European ETFs are reinvesting income
  • Distributing ETFs will pay dividends and generate regular income from your portfolio that you can spend if you need to. You can also use dividends as part of your rebalancing process although they are usually paid more frequently (it’s also worth checking how frequently you will get dividends)
  • Accumulating funds will maximize your future returns as they automatically reinvest your income back into the market with no extra expenses (saves your time and reduces transaction fees)
  • Both options i.e. accumulating and distributing (aka dividend paying) may not always be available
  • In this case it’s good to remain flexible
  • Depending on your country of residence the choice may have tax consequences and a wise selection of ETFs may increase your returns
  • In some jurisdictions, accumulating funds are a way to avoid dividend taxes while in others accumulating funds and distributing are taxed the largely the same way (e.g. UK or Germany) regardless of physical dividend payment (it’s deemed to have been paid for tax purposes unless it’s in a tax protected vehicle like ISA or SIPP in the UK). Again, this website doesn’t provide tax guidance and you should confirm the rules based on your individual circumstances (not only because tax laws are constantly changing)

4. Broker Market Coverage - Key Exchanges for European ETFs

Number of ETFs listed on key Exchanges in Europe
  • ETFs will usually be listed on multiple exchanges at the same time. Cross-listing allows to make ETFs accessible for local investors in multiple markets
  • UCITS (Undertakings for the Collective Investment in Transferrable Securities) is an European Union regulation for mutual funds. The most popular ETFs available to European investors are UCITS compliant
  • There were ETF listings on 15 major European exchanges
  • Choosing a broker is another topic, but keep in mind that they should at least cover most of the Exchanges above given that most ETFs are listed on these (most Brokers do)

Where can I find ETF Information?

You can find all information using the required documents that each provider is publishing, which includes:

  • A Factsheet – ono/two-pager summarizing key information
  • KIID (Key Investor Information Document) – Similar to the one above but legally required and hence standardized. This document is required for UCITS funds in Europe
  • Prospectus – The long (and not always exciting) read
  • Annual report – Regulatory Financial statements 


There is probably a lot of new material here if you just started out. Take the time to digest it but remember that these are only ETF features

The most important decisions you will ever take in respect to your Financial Independence Portfolio relate to Asset Allocation, selection of the best Equity Benchmarks or Bonds 

Don’t rush it, do your research first and ask questions (below) if needed

Good Luck!

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My fundamental reviews of Equity ETFs and Asset Allocation include:

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The information provided in is general in nature only and does not constitute personal financial advice.The information has been prepared without taking into account a reader’s personal objectives, financial situation or needs.

Before acting on any information contained in you should consider the appropriateness of the information having regard to your objectives, financial situation and needs, and seek professional advice where appropriate.

I only talk about products, services and companies I use / would use myself.


This website is non-revenue generating. In addition to time I dedicate to this, I pay for hosting and software to provide you with the analysis.

If you enjoyed my work and found it useful please do leave a comment below or share it with someone that may benefit from itI am grateful for any single feedback

Stay safe & healthy, 



[ultimate-faqs include_category="eu-etf"]

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18 days ago

Hi Raph,
Got the email for this one quite promptly, great read as always. Thanks for the mention, clarification and introduction to trackinsight!
Would be a great tool to utilize in my hunt for the perfect ETF (for me at least)!

14 days ago

Hi Raph, So, I went away and did some digging, and I got another (silly) question. As my broker profits’ off of spreads rather than a platform fee, would your advice be to go for a distributing ETF with a high volume and low spread (~5p which is ~0.06%) or an accumulating ETF with a slightly lower volume and higher spread (~11p which is ~0.10%). The ETFs intend to track the same index (VWRL and VWRP are two such examples) and all other variables seem to be the same. My intention is to re-invest dividends anyways, and the ETF will… Read more »

17 days ago

Nice read! Now you gonna get some traffic from Poland 🙂

17 days ago

This is so cool!

15 days ago

Hands down the best guide for Europeans! Congrats

Tom Anderson
Tom Anderson
11 days ago

Finally a decent non-US investment blog! Great work!

3 days ago

Hi Raph –
Great how-to for ETF selection
All the best,