As economists like to say, there is no free lunch! Investing can be expensive, even if you do not notice it at first glance. In this article, we will explore the true costs of trading US stocks for European investors.
What is the impact of fees on investors’ performance?
According to the report “Costs and Performance of EU Retail Investment Products” by the European Securities and Markets Authority (ESMA), the gross performance (before fees) of retail investors typically diverges from the net performance (after fees) by 1-2% per year, depending on the asset class. In other words, fees eat away at your returns by roughly 1-2% every year – which compounds significantly over long investment horizons.
The fees captured in ESMA’s analysis include both the trading fees charged by brokers and the fees built into each product, such as the Total Expense Ratio (TER), which covers most of the running costs of an ETF or mutual fund.
Unlike the trading commissions you see on each order, the TER is not directly visible in your trading account – it’s deducted continuously from the fund’s value, so you don’t see it as a line item the way you’d see a grocery purchase on your bank statement. The US Securities and Exchange Commission (SEC) has published an investor bulletin that illustrates how these recurring expenses compound and erode portfolio value over time.
As you can see, fees are one of the most important determinants of long-term investment performance, and they’re something every serious investor should focus on.
The Costs associated with trading US stocks
- Spreads: the difference between the ask price (what buyers pay) and the bid price (what sellers receive), with the ask always higher than the bid. You pay the ask price when buying and receive the bid price when selling. The spread is effectively what the broker or market maker earns from facilitating a trade. The higher the liquidity, the tighter the spread should be – so trading a highly liquid stock in the S&P 500 or NASDAQ 100 typically costs very little in spread terms.
- Commissions: the cost charged when you buy or sell a share. This is the most visible cost – it appears directly on your trade confirmation – and the one most investors focus on first. In reality, as we’ll show, it’s often not the biggest cost.
- Currency conversion (FX) fees: since US stocks are traded in USD, a non-US investor first has to convert their base currency (EUR, GBP, CHF, and so on) into USD. This is usually done automatically by the broker. For example, if you want to buy a stock trading at $100 a share with EUR/USD at 1.2000 and a 1% conversion fee, you’d need around €84.18, versus €83.33 with no conversion fee. It seems small per trade, but it adds up over many trades and many years. In our experience, FX fees are often the largest hidden cost when European investors trade US stocks – especially compared with the (often free) headline commission.
- Other costs:
- Non-trading fees: account maintenance, account transfer, inactivity, wire transfer, and similar charges. These can vary significantly between brokers.
- Third-party fees: regulatory, clearing, exchange, and pass-through fees. These are small fixed amounts not set by the broker – the broker simply passes them on (so it earns nothing from them).
Cheapest Brokers for trading US stocks in Europe and the UK – Research by Interactive Brokers
Interactive Brokers analysed the main costs of trading US stock from Europe and the UK using data from different providers as of the 6th of December 2021. The results show the impact of trading different amounts across several competitors.
Comparison of Brokerage Costs for European investors
Comparison of Brokerage Costs for UK investors
One thing you quickly notice is that the fees increase exponentially with the amount invested, except for Interactive Brokers. Besides, under the column “US STOCK COMMISSION” (the explicit cost we talked about earlier), you can see that, usually, this cost is relatively low (even 0% for some platforms), which means that the currency conversion costs are the ones that fill the gap!
Please also note that, for smaller investment amounts, the study results would be different. Interactive Brokers charges a minimum forex conversion fee of USD 2.00, which means that other brokers could be cheaper for investing in US stocks for smaller investment amounts.
There are many footnotes in the image (12!), so we highly advise you to visit their page to understand the study better.
Despite only presenting analysis for EUR and GBP based investors, the same logic would be valid for other non-US investors.
The takeaway
As you can see, the costs of investing in US Stocks don’t include only commissions (fee for buying or selling a stock/opening or closing a trade) but also currency exchange fees and other fees (e.g. regulatory or clearing fees). Usually, the currency exchange rate is the fee that makes the most significant difference in total investing costs when comparing the costs of various brokers.
Regardless of the US stocks you may be interested in, pay attention to how much you spend. This includes both explicit and not so clear costs. By keeping an eye on your trading charges, you can save more money on your side.
Before opening an account, think about your expected needs for the future. Are you looking for only US stocks? Interactive Brokers may be a good option. Do you plan to trade ETFs or European stocks? Other alternatives could be considered.
Are you still scratching your head? Feel free to ask us any questions!
