Many investors prefer ETFs (Exchange Traded Funds) because of their simplicity, liquidity, and significant diversification. The growth of ETFs has been the most significant trend in the asset management industry in the past 20 years. As of the end of December 2022, total ETF assets under management (AUM) reached $1.4 trillion in the US and Europe, growing at an annual compound annual growth rate (CAGR) of approximately $1.5 trillion since 2010. This is almost three times faster than traditional mutual funds.
However, when changing residency to European, the question arises: how to continue investing, taking into account special EU regulations?
In Europe there is a separate UCITS directive (undertakings for collective investment in transferable securities).
UCITS is a set of security standards aimed at protecting investors from dangerous investment channels.
We wrote in detail about what UCITS is here
The very concept of UCITS is about a set of rules and regulations. Funds may or may not comply with them. All investors who DO NOT yet have the status of a qualified investor* and are EU residents can invest exclusively in UCITS ETFs. However, in essence, UCITS gives the investor more protection and transparency than non-UCITS funds
*a qualified investor must meet two of the three criteria:
- Your capital is over $500,000.
- You work in financial institutions and companies
- You enter into transactions for 10 securities per year, or at least 5 transactions in three years, the value of these transactions must exceed $50,000
So, what should a Ukrainian who had an account with Interactive Brokers and is changing his residency to European do:
Company Interactive Brokers has several legal entities around the world, serving customers in different regions. The main legal entity is American Interactive Brokers LLC, registered in the state of Connecticut, in the city of Greenwich. For Ukrainian clients, service is provided through this American division. American Interactive Brokers LLC also operates in many countries in Asia, Latin America and Africa.
European market and rules for EU residents
In the European Union, residents cannot be provided with services from legal entities not registered in the EU. Until recently, two divisions operated in Europe Interactive Brokers — Interactive Brokers Ireland (Dublin) and Interactive Brokers Central Europe (Budapest). However, after recent merger both units merged into Interactive Brokers Europe S.à rl (IBE), based in Luxembourg.
Now all clients who are residents of European Union countries are served through Interactive Brokers Europe S.à rl., which is licensed and regulated in accordance with EU regulations.
If the client remains a resident outside the European Union (for example, in Georgia, Armenia or Moldova), then there is no need to open a new account. It is enough to update the profile, change the residential address and provide documents confirming the new place of residence to change the tax residency.
When should you start the asset transfer process?
It is advisable to start opening a new account and transferring assets after receiving a local tax number and proof of residenceFor example, in Estonia, all refugees are given a personal identification number, which also serves as a tax identification number. Once you have this number, you can open a new account, fill out a W-8 tax form, provide your local tax identification number, and request an asset transfer.
💡 Importantly: The old account can be used until the transfer process is complete. When the transfer of assets is scheduled, the system will warn you not to carry out transactions on the old account.
Account opening procedure for EU residents
If the client changes his/her residency from Ukrainian to European, it is necessary to open a new account in Interactive Brokers Europe. In this case:
- Account opening procedure identical* before opening a Ukrainian account. But on the page with personal data, indicate the passport of Ukraine, but residency of the relevant country. And then describe the reason for opening a new account.
- *****You will need such information Full name; Residential address; Date and country of birth; Citizenship; Country of tax registration and tax identification number; Name and address of employer; Asset and income information; Information on the source of wealth and funds; Investment objectives and experience;
- After opening a new account, assets will need to be transferred from the old account to the new one via an internal transfer. This process is free of charge, but it can take from several weeks to several months due to manual review by the compliance department.
- After opening a new account, you need to open Manual Transfer Request in your old account. Interactive Brokers has a separate category for such requests, and details on the procedure can be found in the section FAQ.
- Interactive Brokers representative will provide you with a “Letter of Authorization” document, which you must print, sign, and attach to the ticket. In addition, the company may request additional documents from the new country (passport, driver’s license, bank statement containing signature and address).
- Special “transfer related notes” are also added. These can be past transactions from payment systems, etc.
- After preparing the documents, you need to go through the process voice verificationTo do this, you need to call Interactive Brokers support, where you will be asked three secret questions.
- After that it will begin asset transfer process, which can take from several days to a month.
- Old account required close by yourself. Or it will close automatically if you don't refill it for a long time.
Asset management on a European account
When you transfer your assets from a Ukrainian Interactive Brokers account to a new account in a European jurisdiction, there are several important points regarding the further management of American ETFs.
- After you transfer US ETFs to a new EU account, these assets remain in your portfolio. They will be marked with NT — this means that "This product is currently unavailable to clients", meaning that this asset is no longer available for purchase. However, hold or sell You can use these assets without any problems.
- Since American ETFs do not meet the requirements of the European directive MiFID II, after transferring assets to a new account, their will not be able to buyThis ban applies to customers with the status retail clientsIf your assets exceed €500,000 or you meet other requirements for status professional client, you may be able to continue buying these assets.
- One way for EU investors is to be able to buy US ETFs through put optionsIf the option closes “in-the-money,” you will receive these ETFs into your portfolio.
- In the “transfer related notes” (step 5 above), Interactive Brokers representatives report that some assets cannot be transferred to a new account. For example, this may apply to unvested shares or permits for Stock Yield, as well as assets related to loans and borrows
Further investments and asset purchases
After transferring assets from an Interactive Brokers US account to a European one, EU investors will no longer be able to invest in US ETFs. However, European investors will have access to UCITS ETFs that meet European standards. And you can create a similar portfolio.
Example of similar ETFs on similar indices/regions
| US | TER | Fund size | Irish | TER | Fund size | Name |
|---|---|---|---|---|---|---|
| SPY | 0.09% | $564.09B | CSPX | 0.07% | $82,419 m | S&P (US developed) |
| IXUS | 0.07% | $37.17B | EXUS | 0.15% | $248 m | Xtrackers MSCI World ex USA UCITS ETF 1C |
| TLT | 0.15% | $54.43B | DTLA | 0.07% | $2,711 m | US treasury 20+yr |
Where to choose UCITS ETF:
There are several useful resources where you can find UCITS ETFs by industry, index, country, direction or asset class:
JustETF: a site where you can find and analyze various ETFs, including UCITS.
UCITS ETFs: another resource for searching and analyzing UCITS ETFs by various criteria.
💡 Important points when choosing a UCITS ETF
Tickers may vary depending on the exchange and currency: The same fund can have different tickers depending on the exchange it is traded on and the currency. For example, iShares Core S&P 500 UCITS ETF (Accumulating) on the London Stock Exchange in USD has a ticker CSPX, and on the exchange in GBX — CSP1.
Portfolio analysis tools: To see the historical returns of your portfolio and test different options, you can use services such as Curvo.