The circumstances determine the choice
Unlike the big difference in tradability, there is hardly any difference between ETFs and index funds in terms of their total expense ratio (TER). The fund’s country of domicile and the resulting tax consequences are important aspects to consider when making a choice. Depending on the circumstances and the type of investor, ETFs and index funds can both have their advantages.
Apart from being subject to different withholding tax rates, another major differentiating factor for ETFs and index funds in Switzerland is the stamp duty. Like stocks, ETFs, too, are subject to a stamp duty on both buying and selling transactions. However, whereas the stamp duty paid when buying or selling ETFs domiciled in Switzerland currently amounts to 0.075%, it is 0.15% for foreign ETFs.
Unlisted Swiss funds, in contrast, are not subject to any stamp duty on purchases or redemptions. When buying shares in a foreign-domiciled index fund, investors have to pay a stamp duty currently amounting to 0.15%; only redemptions are exempt from the stamp tax.
Index funds are more suitable for short-term investments
When looking at the expenses over a given period, it becomes clear that private investors who wish to hold an ETF only for a short period can expect to pay high costs. This is because a stamp duty is incurred on each transaction. Index funds therefore are usually a better solution than ETFs for private investors in Switzerland who have a relatively short-term investment horizon. From a long-term perspective, though, it is wise to pay particular attention to administrative costs (ongoing costs) and tax efficiency related to withholding taxes.
Investors who are thinking about investing in an index through either ETFs or index funds should first analyze the benefits of the two types of funds. Whether ETFs or index funds are the better option depends on the market, the fund’s country of domicile and the investor’s tradability needs.
Investments in financial instruments can entail market risks as well as the risk of loss of capital, as they are subject to developments on the financial markets, which are not precisely foreseeable. The exact risk profile of Credit Suisse Index Fund Solutions is determined by the selection of the specific sub-fund and depends on the replicated indices. Unlike active investments, passive investments are strictly linked to the respective market, which is why a passive investment can be expected to incur a loss that is proportionate to any market loss. This also means that a significant outperformance can not be expected.