ETFs are now synonymous for many Czechs with simple investment in the whole world. With just a few clicks on your broker’s app, you own a piece of the global stock market. But behind every such click are specific legal relationships, regulations and tax obligations that you shouldn’t underestimate. So in this article, we’ll explain what ETFs are, how they work and what investment and legal risks they carry.
Let’s start with a basic question: what is an ETF? ETF stands for Exchange Traded Fund. Think of it as a kind of package of stocks, bonds or other assets that are traded on an exchange in a similar way to a single stock.
The typical scenario is that you don’t want to pick a specific stock and would rather “bet” on the whole index, so you buy an ETF that replicates that index.
ETFs thus allow an investor to diversify easily and relatively cheaply – instead of owning one company, you own a slice of hundreds or thousands of companies at once.
Compared to traditional mutual funds, ETFs have several typical characteristics:
Importantly, even though an ETF looks like a “single stock”, it is in fact a collective investment fund subject to specific regulation (typically the UCITS regime in the EU) and investor protection rules under the European MiFID II directive.
In practical terms, you will mainly encounter ETFs through an online broker or investment platform. You open an investment account, sign a contract and general terms and conditions. You then send money to the broker’s account. In the platform, you search for a specific ETF and enter your buy order – volume, order type (market/limit) and exchange.
There is also an important difference between:
If you want to consult a specific contract with a broker, set up ETF investments or are already dealing with a problem with your current provider, you can contact us at any time. We’ll look at your situation through a legal lens and help you navigate what you’re signing and what your rights are.
When you deal with ETFs, you’re not just investing in the market, you’re also entering into legal relationships with several entities. First, there’s the issuer of the fund (the fund manager – the institution that creates and manages the fund), then the intermediary (the broker or securities dealer or investment platform), and often the custodian (the bank that holds the fund’s assets securely separate from the manager’s assets). These roles are not a formality, as they determine who is responsible for what and what rights you have if something goes wrong.
In the European Union, the UCITS framework (the European rules for collective investment funds, full name “Undertakings for Collective Investment in Transferable Securities”) plays a key role, setting out how funds must be structured, how they must diversify risk and that they must give you KID/KIID (key investor information, a concise, easy-to-understand summary of the risks, costs and operation of the fund). If an ETF is labelled as a UCITS ETF, it means it meets these European rules. This is an advantage for the retail investor as it increases protection and transparency.
The second underpinning is MiFID II (European rules on the provision of investment services; the aim is client protection and the fair functioning of markets). From an investor’s perspective, it ensures that the intermediary provides you with transparent cost information, conducts a reasonableness and suitability test (checking that you understand the product and that it fits your risk and experience profile) and has internal rules in place for dealing with client assets (segregation of your assets, conflict of interest management, control procedures). A broker operating in the EU must comply with these rules or it may not offer services.
For a Czech investor, it is practically the most important thing to check whether the broker is licensed in the EU (has the permission of the regulator) and whether it is listed in official registers (for example, in the list of supervised entities at the Czech National Bank). If you invest through an “exotic” or unregulated platform outside the EU, you risk weaker legal protection, more complex claims and a worse position in case of a dispute or broker’s bankruptcy. In practice, this can mean less access to your money and a longer path to compensation.
From a tax perspective, ETFs for individuals are typically treated similarly to other securities – the ruling is whether the income is from the sale of securities or income from holding (e.g. dividends).
Income from the sale of ETFs is typically classified as other income in the Czech Republic and is taxable on the tax return unless the exemption condition is met.
In general, the following should be observed:
If the conditions for exemption are not met, the gain (the difference between the sale price and the purchase price including costs) is taxed on the tax return at a rate of 15% or 23% depending on the tax base.
For distribution ETFs, the fund pays you dividends. These are usually dividends paid by a foreign fund (in a foreign currency). Withholding tax may be withheld in the fund’s country. In the Czech Republic, a 15% capital gains tax generally applies, and you usually need to take into account double tax treaties and possible foreign tax credits.
ETF taxation can be complex, especially if you combine multiple brokers, different countries and types of income. Consultation with a tax advisor, and ideally a lawyer, is advisable for an accurate assessment if you are unsure of the contractual setup or the quality of the broker.
Tip: The Long-Term Investment Product (LTIP) is a relatively new instrument designed to motivate Czechs to save and invest regularly for their old age. Read about it and find out if it is suitable for you.
ETFs are often presented as a safe and sensible way to invest, but this is only partly true. While they are popular for their simplicity and diversification, they still carry several types of risks that every investor should be aware of.
The first is market risk. This is because the value of ETFs changes with the market in which they invest. If the market goes down, so does the value of your ETF. For stock ETFs, this will be evident during crises or corrections, bond ETFs react to interest rate movements, and thematic or sector ETFs (for example, those focused only on technology) can be very volatile. Even if you invest in a broad index, you are not guaranteed a profit – the value may remain negative for several years.
Another risk is currency risk. Most ETFs are denominated in a foreign currency (e.g., euros or dollars). This means that, in addition to the fund itself, you are also affected by changes in the exchange rate. If the koruna strengthens, the value of your investment in koruna will fall, even if the fund performs well on the stock exchange. For long-term investments, this can significantly affect your actual return. While there are so-called currency-hedged ETFs that reduce this effect, they tend to be more expensive and have higher fees.
Also beware of product and structural risk. Not all ETFs are simple and straightforward. Some types, such as leveraged ETFs or inverse ETFs (which profit from market declines), are more for experienced investors and short-term speculators. There are also ETFs tracking complex indices, commodities or derivatives that are often not fully understood by the retail investor. Although European MiFID II rules are designed to protect clients from overly complex products, in practice this protection may not always be 100%.
Finally, there is the legal risk that many people underestimate. The problem can arise if you invest through an unregulated or foreign broker outside the EU where European protection standards do not apply. Unclear terms and conditions, contracts in a foreign language you don’t understand or unclear rules for dealing with client assets are also risks. In extreme cases, you may only “own” the ETF on paper, but you may not be able to access your money if the broker goes bankrupt. It is therefore very wise to have your contracts and terms checked by a lawyer before you invest.
Simply put – ETFs are not without risk. They can be an excellent tool for long-term investing, but only if you understand what you are buying and know what risks you are taking.
In addition to the “what is an ETF” question, there’s often another: How do I know which ETF is right for me? First and foremost, what index or asset the ETF is linked to is important. Each ETF tracks a specific market or part of a market. These can be broad stock indexes that include many companies from around the world and help spread the risk. Other ETFs may focus on a particular sector or theme, such as technology, healthcare or environmental companies, where there tends to be more fluctuation in value. There are also bond or commodity ETFs that track the price of gold or interest rates, for example.
Fund regulation is also important. If an ETF is labelled as a UCITS ETF, it means it meets the strict European rules for collective investment funds. This framework ensures that the fund must be transparent, diversified and that the investor receives mandatory information on risks and costs. Put simply – UCITS ETFs are safer and better controlled for the retail investor.
When making your decision, also look at the expense ratio of the fund, which is usually referred to as TER (Total Expense Ratio), the total annual expense ratio of the fund. At first glance, the difference between 0.1% and 0.3% may seem insignificant, but in long-term investing this small difference can mean thousands of crowns of difference in returns.
Another factor is the size and liquidity of the fund, i.e. how much assets the fund manages and how easy it is to trade on the stock exchange. Larger funds tend to be more stable and reliable because they have more investors, more oversight and more liquidity – meaning it’s easier to sell or buy an ETF quickly at a fair price.
Also look at how the fund tracks its index, called the replication method. Some funds use physical replication, meaning they actually buy the stocks or bonds that make up the index they track. Others use synthetic replication, where they replicate returns using financial derivatives (such as swaps). These can be more complex and carry slightly higher risk. It is also useful to find out whether the ETF uses currency hedging, which means that it protects the investor from exchange rate fluctuations, although usually at the cost of slightly higher fees.
Finally, every investor should also review the KID or KIID (Key Investor Information Document) and the fund’s prospectus. These documents provide a brief overview of the fund’s operations, risks, possible scenarios and costs. They are compulsory and are intended to be understandable for the ordinary investor.
In addition to these parameters, it is good to ask the human question: Do I really understand what I am investing in? If not, it’s better to slow down and have the situation explained to you – ideally by someone who understands both finance and the legal side.
Tip: What is investing, how does investing work and how to choose the right investment instruments? We’ll answer that in our article on what you can invest in.
Exchange Traded Funds (ETFs) are exchange-traded funds that allow investors to easily and cheaply invest in a broad portfolio of stocks, bonds or other assets, usually replicating an index. Compared to traditional mutual funds, ETFs are traded on an exchange in real time, have lower fees and are often passive. Their legal framework in the EU is provided by the UCITS Directive (for collective investment funds) and MiFID II (for investor protection and broker regulation). From a tax perspective, proceeds from the sale of ETFs in the Czech Republic are subject to a three-year time test and a limit of CZK 100,000, with a ceiling of CZK 40 million for tax exemption from 2025. Dividends from distribution ETFs are subject to 15% tax, while accumulation ETFs reinvest them. Investing in ETFs carries risks – market, currency, product and legal – and it is important to choose a licensed broker within the EU. When choosing a fund, it is crucial to look at its index, regulation (UCITS), expense ratio (TER), size, liquidity, replication method and any currency hedging. ETFs are suitable for beginners but require a basic understanding of their operation, legal relationships and tax implications.
An ETF (Exchange Traded Fund) is a fund that is traded on an exchange like a stock. It usually follows an index (e.g. a stock index) and aims to perform in line with the market. A traditional mutual fund is not traded during the day on an exchange – you buy and sell shares through the fund manager, often with higher fees. ETFs tend to be cheaper and more flexible, but otherwise both are a form of collective investment.
For many beginners, ETFs are a good way to invest in a broadly diversified portfolio (e.g. a global stock index) without having to pick individual stocks. Their lower costs and simplicity make them popular long-term investment vehicles. But even a beginner should know what an ETF is, how it works, what risks it carries and how it is taxed. If you don’t understand the contracts with your broker or the specific structure of the fund, professional consultation is in order.
Gains from the sale of ETFs are generally treated in the Czech Republic as income from the sale of securities. If you meet the 3-year time test or do not exceed the limit of CZK 100,000 in aggregate income from the sale of securities per year, the income may be tax-free. Otherwise, you are taxed on the difference between the sale price and the purchase price on your tax return. Dividends from ETFs are usually subject to a 15% income tax, and foreign withholding taxes must be taken into account. We recommend that you consult your tax advisor for the specific procedure.
The key is to verify that the broker is licensed and supervised by an EU regulator (e.g. the CNB or another European supervisory authority). You can usually find this in the official lists of regulated entities. Next, check the GTC and fee schedule, the conditions for handling client assets and the availability of support. Beware of brokers without clear regulation or based in exotic jurisdictions – in such cases you may be in a significantly weaker position in the event of a dispute.
In theory, yes – especially for equity ETFs in extreme market conditions. In practice, broadly diversified index ETFs are more likely to experience temporary significant declines than absolute losses. But there may also be a legal problem: the broker goes bankrupt, client assets are not properly segregated, or contractual terms are disputed. Therefore, it makes sense not to underestimate the legal side either – not just to look at a chart of returns.
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Ondřej is the attorney who came up with the idea of providing legal services online. He's been earning his living through legal services for more than 10 years. He especially likes to help clients who may have given up hope in solving their legal issues at work, for example with real estate transfers or copyright licenses.
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