Updated: Apr 24, 2019
Based on past questionnaires I gather roughly half the community prefers articles and the other half videos so I will also be putting out a video explaining this all again but this article should get the ball rolling for Europeans within the EEA to choose the solution that best suits them.
I have 3 solutions you can try as potential workarounds to access the US based ETFs we know and love:
Stock replacement through options
CFDs (Contract For Difference)
What is MiFID?
Markets in Financial Instruments Directive (MiFID) has been in effect since 2007 across the European Union. It’s how the EU regulates financial markets to ensure competitiveness across the single market for investment services. It covers everything from organizational requirements for investment firms, reporting standards, what financial instruments are available, trade transparency, everything to ensure the single market functions fairly and abides by uniform standards.
What is MiFID II?
As the name suggests, MiFID II is the revision to the original framework and went into effect in January 2018. It’s designed to increase investor protection and increase transparency across all asset classes and financial instruments. It does other things as well including moving OTC trading to regulated venues, volume caps for equity dark pools, new rules for analyst research and commissions, but it’s really the tougher standards on financial instruments that is the big concern to retail investors.
What is PRIIP and KID?
Now we’re getting into the heart of why this has been a thorn in the side of retail investors. PRIIP stands for Packaged Retail and Insurance Based Investment Products and it’s a regulation that aims to improve investor protection. One of the ways it does this is by requiring what’s called a KID (Key Information Document) for all investment products available for trading to European Economic Area residents. This is all designed to help investors make more informed decisions by having a clear understanding of the product in simple language before initiating a trade.
So why is this an issue?
Simply put, very few of the traditional ETFs that are available to investors actually have a qualified KID and the vast majority simply don’t conform to the new MiFID II / PRIIP regulations. Massively popular products like the MDY, IEF, GLD, SVXY, VXX, pretty much every product we use in our day to day investing don’t actually reach the level of transparency required by these new rules. In fact hardly any of the ETFs available in the United States qualify. We’re talking giants like the SPY, IVV, VTI, QQQ etc aren’t available for trading within the European Economic Area anymore.
Will they be available in the future?
Intuitively we would say yes of course the major ETF companies will want to go through the process of conforming in order to ensure maximum exposure. However realistically I’m not so sure they ever will. It’s actually a pretty arduous and potentially expensive process and may just not happen in many cases. It would be nice if the big ones were available again soon but I’m not holding my breath for that. We need to take action by finding alternative solutions.
Solution #1) ETF replacements
* Currently there are no ETF replacements for any of the volatility products like SVXY and VXX. For our volatility investing we will use solution #2 down below.
However there are some potential ETF replacements for the 3 components of our VTS Tactical Balanced Strategy which rotates tactically between positions in stocks bonds or gold depending on market conditions.
By far the most important aspect of this strategy is the timing of when we hold certain positions. When we’re in equities vs when we’re in our defensive positions of bonds and gold is the crux of the strategy. The actual ETFs that represent them is less important which is why the replacement option is probably the best one. In the grand scheme of things the difference between the SPY or the MDY for example will be small. The difference between 7-10 year Treasury’s vs 20+ year again isn’t nearly as important as when we hold them so feel free to use some of these suggestions below, or if you’re able you can also find your own. We just want US based representations of generic stocks bonds and gold ETFs.
* There are other available ETFs as well but these are the ones I’ve selected as the best solutions to keep everything uniform for everyone.
Replacement for MDY stocks:
CSPX – iShares Core S&P 500 UCITS ETF * The ticker symbol depends on the desired currency: CSSPX for USD SXR8 for EUR CSP1 for GBP
Replacement for IEF bonds:
IDTM – iShares Treasury Bond 7-10 UCITS ETF * The ticker symbol depends on the desired currency: IDTM for USD BTMA for EUR IBTM for GBP
Replacement for GLD gold:
PHAU – ETF Securities Physical Gold ETF * The ticker symbol depends on the desired currency: PHAU for USD VZLD for EUR PHGP for GBP
Naturally there will be slight differences in tracking and fees but in my opinion for the vast majority of EEA investors out there, these replacements will be the simplest and most efficient way to closely replicate the Tactical Balanced Strategy.