How to invest in ETFs & Index Funds from UAE & Dubai

Passive investing through index funds and ETFs has been on the rise in recent years, and with good reason. It is one of the simplest, cheapest, and overall most effective ways to invest for both beginner and experienced investors. 

However, it can be confusing to navigate between thousands of different ETFs and dozens of platforms to choose from. In general, one needs to have the proper information at hand when deciding about ETF & index fund investing.

In this article we will give the UAE investor an explanation of what index funds and ETFs are, and how and where to invest in them. After reading this article you should have the necessary knowledge and confidence to invest in index funds & ETFs yourself.

The difference between index funds and ETFs

To start things off, we will explain one of the most common investing misconceptions: the difference between index funds and ETFs.

We will first start with their similarities. Index funds and ETFs both:

• Enable you to invest in an entire basket of financial assets (stocks, bonds, etc.)
• Follow a passive investing strategy
• Often offer wide diversification (across different sectors and/or markets)
• Have low costs compared to most other financial products

In practice, this means that both passively buy a portion of a large number of different financial assets included in a particular sector or market. The biggest benefits of this passive investing strategy are wide diversification (dispersion of risk) and low costs associated with it.

The biggest differences between index funds and ETFs lie in where and when you can buy them. We have summarized the major differences in a table:

Index funds	ETFs
Purchased from the vendor	Purchased directly from the stock exchange
Require a larger initial investment	Require a smaller initial investment
No intraday price fluctuations	Intraday price fluctuations
Usually taxed as investment funds	Usually taxed as stocks (shares)
Required to invest a part of the fund in liquid assets	Required to invest 100% of the fund in the assets that the fund tracks
Management fee + possible additional fees	All fees are in the Total Expense Ratio (TER)

What types of ETFs are there?

ETFs can be categorised by multiple factors. One of them is the asset type they hold and the investment strategy within each asset class. Assets that can be invested in through ETFs include:

• Stocks
• Bonds
• Precious metals
• Commodities
• Real estate
• Currencies

Stock ETFs can be further divided by:

• Geography: Global, Developed markets, Emerging markets, US, Europe, etc.
• Sectors: tracking different market sectors such as technology, finance, healthcare, etc.
• Cap (company) size: Large cap, mid cap, small cap.
• Investment factors: Growth, value, momentum, etc.

Usually, ETFs follow the typical long strategy, in which the buyer profits proportionally from the growth of the price of ETF shares. However, some ETFs use different strategies such as leverage (debt) to amplify the returns (and losses), or profit when the prices drop by shorting the ETF.

Some of the ETF investing strategies include:

• Long-only ETFs: The fund buys all the assets in the index weighted by their market cap (size) and mimics the return of the index closely (minus fees and the tracking error).
• Equal-weighted ETFs: All the assets in the fund have equal weight (as opposed to being weighted by their market cap size).
• Inverse ETFs: These funds short the underlying assets, essentially profiting from their price decline.
• Leveraged ETFs: They use leverage (debt) to amplify returns (and losses) by a factor of 2, 3, or more. 
• Leveraged Inverse ETFs: A combination of the previous 2 strategies, amplifying returns in the event of price decline (and vice-versa for price growth).
• Synthetic ETFs: ETFs are usually physically replicated, which means that they physically invest in the underlying asset. Synthetic ETFs usually invest in a financial derivative of the underlying asset (such as futures or swaps), and not the underlying asset itself

ETFs can also be divided by their dividend treatment. Company dividends, bond coupons, and similar payouts of the assets comprised in the ETFs are passed along to the investor in a way dependent on the following ETF types:

• Accumulating (acc.): The dividends are automatically reinvested, buying more shares of the same fund.
• Distributing (dist.): The dividends are paid out to the investor in cash and the investor decides if he wants to reinvest them or not. 

It is usually listed in the ETF name whether it is an accumulating (acc.) or a distributing (dist.) fund. If not, this and other information can be found in their KIID (Key Investor Information Document).

How to buy ETFs in UAE & Dubai (step by step)

We will give you a simple step-by-step process on how to invest in ETFs from the UAE & Dubai:

#1 Select an ETF

Today there are thousands of ETFs to choose from. The choice will vary from person to person, depending on factors such as:

• Personal risk tolerance
• Investment horizon
• Investing goals & strategy

One of the common ways to help beginners select ETFs is by looking at ETFs with large assets under management (AUM). This number often indicates a longer track record and larger investor trust in the issuer of the ETF.

Each ETF has a different symbol under which it can be searched. We recommend using the unique ISIN code. A popular and somewhat easier way is to use the ticker symbol (e.g. VUSA), but these can vary for the same ETF across different exchanges where they’re offered.

#2 Select a broker

A broker is a platform that provides you access to trading with different financial products (usually including ETFs) on the financial markets. It is an intermediary between the investor and the financial markets. 

Some of the most important factors when choosing a broker are:

• Choice of financial products: They need to have the products you are looking for. 
• Fees: Most notably, inactivity fees, buying and selling fees, and other fees.
• Platform: The platform must be easy to navigate, especially for beginners. Also, educational materials and other investing information are always a plus.
• Regulation: You must ensure that the broker is well-regulated and supervised and that it has the license to offer its services in the UAE.
• Customer service: What are the ways of reaching for help and what are the experiences of other investors in this area?
• Minimum deposit: Some platforms enable you to start investing with as little as 1 USD or 1 AED, while others require larger sums.
• Opinions of other customers: It is recommended to check what current or former broker customers say about the platform and the apps used to access the platform.

You can also read our article about the Best Online Stock Brokers & Trading Platforms in Dubai & the UAE if you need more info about the topic. We have made a short comparison of the best trading platforms in the UAE & Dubai in the following table:

Broker	Fees for stock & ETF trading	Minimum deposit	Trading apps	Stocks/ETFs available
Interactive Brokers	From $0.0005 (Tiered) to $0.005 (Fixed) for US stocks	$0	IBKR GlobalTrader, IBKR Mobile	✔
eToro	No commissions (spread and conversion fees may apply)	$50	eToro	✔
Sarwa	No commissions (Sarwa Trade)	$1	Sarwa	✔ (Sarwa Trade)
Freedom24	From $0.008 to $0.02 per share + 1.2€ to 2€ minimum per order (depending on the account type)	$0	Freedom24	✔
Plus500	No commission (included in the spread)	$100	Plus500 Trading	✔ (Plus500Invest)
XTB	$0 on the CFDs on stocks (0.30% markup included in the spread)	$0	xStation Mobile	X (only CFDs on stocks & ETFs)

Keep in mind that you will most often need personal documents such as a passport or a national identity card, along with possible proof of residency to open a brokerage account.

#3 Buy the ETF

After you have found the ETF and broker that suit your needs, all that is left is to buy shares in the desired ETF. First, you will need to deposit funds to the platform. This process varies from platform to platform, but a bank wire is the most commonly accepted type of transfer, among others such as credit card payments, PayPal, and others.

Also, keep in mind potential currency conversion costs if you need to transfer funds and/or trade ETFs in a currency different than the one you usually use.

Now you are ready to buy your first ETF! We will outline the most important steps in this process by using one of the most well-known global brokers – Interactive Brokers. These steps may vary depending on the brokerage platform you choose to use. You can also check out our full review of Interactive Brokers.

Step 1: Find your ETF in the search bar, using the ISIN symbol or the ticker

Step 2: Click on Buy

Step 3: Input the desired amount, choose the appropriate order type, and click on “Submit Buy Order”

Note: make sure to understand different order types before you decide to buy. Some of the brokers may not even offer different order types but the standard market order.

Also, keep in mind the currency of the ETF to minimize your currency conversion costs while making the purchase.

Taxation of ETFs in the UAE & Dubai

There are no capital gains or dividend taxes for investors in the UAE. This includes ETF investing.

However, unless you are a US citizen, you should avoid investing in US-domiciled ETFs. These may be liable for estate tax if you die (up to 40% on amounts over $60,000) and a 30% withholding tax on dividends. Stick to ETFs domiciled in Europe (with ‘UCITS’ in their name), ideally Irish or Luxembourg-domiciled (due to favorable dividend tax treatment).

Pros and cons of investing in ETFs in the UAE & Dubai

Some of the main pros and cons of investing in ETFs in the UAE & Dubai include the following:

Pros:

• A very wide choice of ETFs to choose from
• A wide choice of brokerage platforms that support ETF investing
• One of the simplest ways to start investing
• An easy way to diversify risk across many assets in a single product
• ETFs usually have very low costs 
• You can capture the growth of the best-performing companies and limit exposure to the worst-performing companies

Cons

• You can not outperform the underlying index as you can with active investing
• Most ETFs are market weighted, which means that most of your investment goes to the largest holdings
• You can not choose to filter out certain companies from the ETF

Recommendations for ETF investing in the UAE & Dubai

Some points to keep in mind when investing in ETFs in the UAE & Dubai include:

• Always have your investing strategy and goals in mind before making decisions
• Choose ETFs according to your strategy and goals
• Choose a broker which suits your needs and investing style
• Keep costs in mind: currency conversions, trading fees, inactivity fees, expense ratio of the ETF, etc.

Conclusion

To sum it all up, you have to do the following steps when investing in ETFs in the UAE & Dubai:

1. Choose an ETF: It has to suit your investment strategy and goals. Carefully choose the ETF type and keep costs (TER) in mind.
2. Find a broker suitable for your investing needs: Pay attention to fees, regulations, the choice of ETFs, currency conversions, etc.
3. Open and fund the brokerage account: This process will vary across different platforms.
4. Send a buy order for the desired ETF(s): Keep in mind in which currency you are buying the ETF shares and which market order you are using.

That’s it! It has never been easier, quicker, and cheaper to start investing in ETFs than today. Having a wide variety of both platforms and ETFs to choose from makes this process simple, even for beginners.

Hopefully, this article will help you in navigating the world of the index fund and ETF investing. If you think we missed something, let us know in the comments below!