What an index fund is
A share index, such as the world’s largest companies or a single country’s stock market, is a list of companies. An index fund (or an index ETF, which trades on a stock exchange like a share) simply buys them all, in proportion to their size. Nobody picks winners, so it’s cheap to run.
Most ETFs sold to Irish investors are domiciled in Ireland or elsewhere in the EU, which decides how they’re taxed: see below.
Why it usually wins
- You get the market’s return. Some companies soar and some fail, but you own all of them.
- It’s spread out. One company going bust barely moves an index fund.
- It’s cheap. Index funds often charge 0.1% to 0.3% a year. Actively managed funds often charge 1% or more.
- Most stock pickers fall behind. Studies of fund performance, such as S&P’s SPIVA reports, find that most actively managed funds do worse than their index over 10 to 15 years.
What fees cost you
€10,000 invested for 30 years, growing 7% a year before fees:
| Yearly fee | After 30 years |
|---|---|
| 0.1% | €74,017 |
| 1% | €57,435 |
| Difference | €16,582 |
The fee comes out every year, and so do the returns it would have earned. The compound interest calculator shows growth with your own figures.
Over 30 years, a 1% fee costs you
€16,582
- You keep (1% fee)€57,435
- Lost to the higher fee€16,582
Assumes a 7% return every year before fees. Real returns vary, but fees come out every year.
How Irish tax changes the picture
Ireland taxes funds and shares differently, and it matters more here than in most countries:
| Index funds and ETFs (exit tax) | Shares (capital gains tax) | |
|---|---|---|
| Rate | 38% in 2026, 35% announced from 1 January 2027 | 33% |
| Yearly exemption | None | First €1,270 of gains |
| Taxed before sale | Every 8 years (deemed disposal) | No |
| Losses | Can’t be used | Set against gains |
So the same growth usually leaves you with a little less in an ETF than in shares, mainly because deemed disposal takes tax early:
- ETF or fund Exit tax at 35%, with deemed disposals in years 8 and 16
- You keep €22,487 Tax €6,724
- ETF, if tax were only charged on sale The same rate, with no deemed disposal (for comparison)
- You keep €24,346 Tax €7,725
- Shares held directly Capital gains tax at 33% on sale, after the €1,270 exemption
- You keep €25,207 Tax €6,864
Deemed disposal costs €1,859 here, even though less tax is paid in total
Illustrative: the same growth every year, no distributions and no fees. Deemed disposal takes tax early, so less money is left to grow.
That doesn’t make picking shares the better choice. With only a few shares, one company doing badly can cost you far more than the tax difference. Most people are better off with index funds, held where the tax is lowest: a pension first.
Picking your own stocks
It can be fun, and some people do well, but:
- A few stocks are risky: one bad result can wipe out years of gains.
- Trading costs and tax add up if you buy and sell often, and you have to report and pay CGT yourself on gains over €1,270 a year.
- It’s hard to tell skill from luck over a few years.
If you want to try, keep it to a small share of your money, and the rest in index funds.
How to start
Your pension is the simplest place to hold index funds: contributions get tax relief, and the growth isn’t taxed until you take it out, so there’s no exit tax or deemed disposal. Many workplace pensions and PRSAs offer index funds.
Outside a pension, work out the tax with our exit tax calculator and see where to invest. Budget 2027 also announced a new Savings and Investment Account without deemed disposal, with details expected in the Finance Bill.
Invest money you won’t need for at least 5 years, and keep going when markets fall: selling in a panic turns a temporary fall into a real loss. Start with investing basics if you’re new.