Can U.S. citizens who live in France buy ETFs?
We are often asked about ETFs, particularly index funds for US persons who live in France. In seminars and online there is so much discussion about PFICS for European ETFs and the assumption that Americans who live in France cannot buy US ETFs. But is it true?
The answer is – it depends. First, let’s think about why French residents are not supposed to buy US ETFs. The reason is that in France, the regulatory authorities are watching out for bad actors and they require the all funds sold to European residents provide to their clients a simple document known as a KIID, which lays out in a few pages the risks and returns of the proposed investment. This to me makes a lot more sense than the American way where investors receive a prospectus filled with legalese, which nobody reads anyway. US providers of ETFs have so far been unwilling to provide such a document to European investors. One reason is because the regulator in the US, the SEC, prohibits the presentation of « forward » returns. So, it the ETF provides information to one regulator, it finds itself in violation of the other.
The question is whether there is a work-around to this, and it turns out that there is. Remember that European regulators are concerned about protection of unsophisticated investors, so if someone is considered a « professional investor », then they can opt out of the regulation and indeed buy US ETFs without the required disclosures. Now a professional investor may sound scary, but the regulations define this person as follows.
A retail client who has a portfolio valued at least 500,000€ in liquid assets, performance of transactions of more than 600€ per transaction on financial instruments, with at least 10 such transactions per quarter on average over the past four quarters. And finally, an adequate assessment by the brokerage firm of the client’s competence, experience and knowledge in order to obtain reasonable assurance that the client is in a position to take investment decisions and understand the risks incurred. Let us take a look at these requirements.
First, the value of the portfolio is easy to understand. This €500,000 does not have to be put into an investment account with a brokerage firm, you just need to provide statements to prove that you have this amount in your net worth. In other words, if you have money in the bank, this counts. The thinking must be along the lines of, if you can accumulate €500,000 in assets, you must have some level of sophistication, although this is not necessarily the case.
Second, you must have made at least 10 « transactions » or trades within a 3 month period, with a value of at least 600€. This may seems complicated, but it isn’t. 10 trades in three months, means 3-4 trades a month. Remember that once you are considered a professional investor, you don’t have to continue to invest in this way. Look at the amount. Six hundred euros is very little for a portfolio valued at more than €500,000. And if you haven’t done this many trades, you could quickly reach this level in no time.
Finally, the brokerage firm must make an assessment of your skills and ability. This is a relatively low hurdle to overcome. If you have never traded stocks or ETFs though, you probably should not try to become defined as a « professional » investor. But for those who do have experience, or are backed by an investment advisor, you can easily accomplish this. In this way, you won’t have to hire a US advisor who tells you that only they can invest in ETFs. Because you can as well…
In conclusion, there is rarely a reason who an investor needs to open an account in the US if they are a resident in Europe. While not all investors will qualify as « professional investors », there are plenty of ways to invest.