The Changing Landscape of Investing

A few years back, investing felt like an intricate web of spreadsheets and heavy jargon that could put anyone to sleep. But today? It’s as simple as a tap on your phone. That’s likely why exchange-traded funds (ETFs) are gaining popularity among investors.

ETFs can be thought of as baskets that hold various investments, including stocks, bonds, and commodities, and they trade on stock markets just like individual stocks. Instead of putting your money into one company, you’re spreading it across an entire sector.

This trend is especially appealing to younger investors who are using apps like Revolut, Trade Republic, and eToro to dip their toes into the market.

We consulted Frank Conway, a financial advisor and founder of MoneyWhizz, to get a clearer picture of ETFs.

Popular ETFs to Know

You might recognize some of the major ETFs like the STOXX Europe 600 and the S&P 500.

The STOXX Europe 600 includes 600 major companies listed across 17 European countries. It features household names like Nestlé, LVMH, Shell, as well as key players in various industries, from healthcare to finance.

Across the pond, the S&P 500 tracks nearly 500 of the largest companies in the U.S., including tech giants such as Microsoft, Apple, Nvidia, Amazon, and Alphabet.

As Conway notes, “Instead of buying shares of each company in the ETF, you buy shares in the ETF itself, gaining exposure to the performance of all the included companies.”

Taxation on ETFs in Ireland

The way ETFs are taxed in Ireland has drawn quite a bit of criticism.

Conway points out that the tax system is rather harsh on average investors. The exit tax on ETFs was historically high at 41%, but it was recently reduced to 38% in the October budget.

Additionally, investors are limited to a tax-free allowance of just €1,270. There’s also the confusing “deemed disposal” rule, which can lead to paying taxes even if no actual sale of investments has occurred.

As Conway puts it, “Albert Einstein regarded compound interest as the eighth wonder of the world, and unfortunately, the Irish deemed appropriation rule acts as a compound killer.”

This means that investors in Ireland must declare their gains and potentially pay taxes every eight years after purchasing an ETF, regardless of whether they’ve sold it or even realized a profit. This cycle repeats every eight years.

On a troubling note, losses from ETFs can’t be claimed later.

Conway gives an example: “If your ETF doubles in value after eight years, you’ll need to declare that gain and pay taxes on it.” He adds, “But if that same ETF subsequently crashes, there’s currently no tax relief for that loss.”

On the flip side, Ireland’s favorable tax regime makes it attractive for ETF providers, which is why many are based there.

Yet, Conway highlights a discrepancy: while Ireland is a base for ETF companies, the same benefits aren’t necessarily passed on to the average investors buying those funds.

Comparing Ireland’s Rules with Other Countries

When you look at ETF taxes, Ireland’s rates are on the higher end compared to other countries.

For instance, investors in the U.S., U.K., and India typically pay about 20% tax on profits.

According to Conway, “Different rules exist for short- and long-term investments, but the general limit tends to hover around 20%.” He adds that other nations often have more generous tax-free allowances. “For example, the UK almost quadruples the tax-free threshold available here,” he notes.

To illustrate the tax disparity, Conway uses the analogy of two brothers—one living in Navan, Co. Meath, and the other in Newark, New Jersey.

Assuming a 9% growth rate and factoring in management fees (40 basis points in the U.S. and 50-100 basis points in Ireland), if both invested €40,000 over seven years, the after-tax profits would showcase a stark difference.

The brother in Newark could expect around €25,300 to €26,900 in returns, while the one in Navan would only see profits between €16,100 and €17,400, thanks to Ireland’s high taxes and minimal tax-free threshold. Even with upcoming changes to the exit tax in 2026, the difference remains significant.

“In summary, the brother in Navan ends up earning considerably less, despite taking on the same investment risks,” Conway explains.

Are ETFs a Good Investment?

Once many people learn about the regulations impacting investors, they may hesitate to invest in ETFs.

The deemed disposal rules and meager tax exemption limits can greatly affect returns, sometimes inducing anxiety.

Still, Conway argues that ETFs generally provide better potential returns compared to leaving cash in a low- or no-interest savings account.

“So much household savings are just idling in low-yield accounts,” he points out.

“Families often prefer to keep their money there, even as inflation erodes its value, rather than venture into an ETF that involves tax implications on gains even before they’ve been realized.”

Despite these concerns, Conway sees ETFs as a smart way to build financial security.

He emphasizes their appeal to younger investors, particularly as gaining a foothold in the property market is taking longer than before.

“Many are closely watching this area, seeking alternative routes to financial security, and are frustrated with ongoing delays in promised reforms,” he observes.

However, he does advise that patience is key when investing in ETFs.

“One of the best strategies I’ve encountered is simply to ‘buy and go,’” he explains.

“Markets fluctuate, but they generally trend upward over the long haul.”

For instance, the S&P 500 has averaged growth of around 9% annually since 1926.

That said, the market does have its downturns, and valuations can dip dramatically.

“Understanding these ebbs and flows in the market and how ETFs respond is essential for truly assessing their worth and potential,” he concludes.