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, and has trading in the past six months of 200,000€. 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.
The 200,000€ requirement for having traded is a clear demonstration of a « trader ». It is also the favorite type of clients of a brokerage firm, for obvious reasons. While trading 200,000€ on a 500,000€ portfolio is quite a bit, as the portfolio value rises, the percentage of turnover declines. So, on a 500,000€ portfolio, is means 40% turnover, it falls to 20% if the portfolio value rises to 1,000,000€.
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.