Your carefully constructed portfolio of Vanguard and iShares ETFs, the so-called “Holy Grail” of passive investing, has survived market crashes, inflation spikes, and even the occasional crypto bubble. But could it withstand a geopolitical crisis over an ice-covered island in the North Atlantic? The Greenland controversy has exposed a rarely discussed vulnerability in the investment strategy millions of European savers rely on: jurisdictional risk.
When Territory Disputes Meet Portfolio Theory
The question isn’t as far-fetched as it sounds. When former US officials discuss acquiring Greenland through military or economic pressure, they’re not just challenging Danish sovereignty, they’re testing the boundaries of international financial cooperation. For European investors holding billions in US-domiciled assets, this creates an uncomfortable thought experiment: What happens if the US and EU actually become adversaries?
The mechanics of ETF investing obscure a critical dependency. Your Vanguard FTSE Developed World UCITS ETF might trade in Frankfurt and comply with EU regulations, but its underlying assets, Apple, Microsoft, Amazon, are US securities. The fund’s domicile in Ireland or Luxembourg provides legal comfort, but not geopolitical insulation.
The Russian Precedent: What Sanctions Actually Do
German investors have already witnessed investment seizure through sanctions, just not from the American side. When Russia invaded Ukraine, Russian securities vanished from European trading platforms overnight. VTB Bank’s European subsidiary, despite operating from Frankfurt, had to cease operations. The assets didn’t disappear, but access did.
One analysis from German-Russian business relations shows that 49 percent of German companies view sanctions as more damaging to Germany than to Russia. Yet four percent of German firms in Russia still plan a complete withdrawal, with over 100 billion euros in assets trapped by Russian laws restricting profit transfers. The parallel is instructive: geopolitical decisions made in Washington or Brussels can render foreign-held assets illiquid.
The critical difference? Russia’s economy represents a fraction of global markets. The US financial system underpins them.
Why Your UCITS ETF Isn’t a Shield
Many European investors believe UCITS compliance creates a protective barrier. The Vanguard FTSE Developed World UCITS ETF Accumulating (IE00BK5BQV03) demonstrates why this is only partially true. Yes, it follows EU investor protection directives. Yes, it trades on XETRA and other European exchanges. But its 0.12% expense ratio and 127.81 million USD net asset value depend entirely on continuous access to US markets.
If US authorities restricted European access to US securities, the Irish-domiciled fund would face an impossible choice: violate US law or become unable to track its index. The UCITS wrapper doesn’t grant immunity from geopolitics, it just adds a regulatory layer.
The Credibility Calculation Washington Must Make
The counterargument dominates most discussions: The US would never risk its financial credibility. Targeting European investors would trigger a mass exodus from US Treasuries, sending yields skyrocketing and potentially bankrupting a government that funds itself through debt issuance.
Historical parallels are frequently cited. When Germany nationalized foreign investments before WWII, it had resources within its borders and didn’t rely on foreign currency to the same extent. The US, by contrast, needs constant foreign demand for its debt. As one financial analyst noted, if the US started expropriating investors, “alle US-Staatsanleihen abgestoßen werden, die Renditen der Anleihen steigen ins unermessliche und die USA wird nicht mehr in der Lage sein neue Schulden aufzunehmen.”
But this assumes rational actors and linear consequences. The Greenland discussion suggests something else: a willingness to consider actions previously deemed unthinkable.
Diversification Beyond Geography
The practical response isn’t panic-selling your US equity exposure. It’s recognizing that geographic diversification means more than holding companies from different countries. It means diversifying jurisdictional risk.
Several strategies emerge from this analysis:
- 1. Increase non-US developed market weightings: The EURO STOXX 600 or DAX reduce US jurisdictional exposure while maintaining developed market quality.
- 2. Consider alternative domiciles for emerging markets: MSCI India or Nikkei-tracking products from non-US providers create separate legal structures.
- 3. Physical gold and real estate: Assets that exist outside electronic clearing systems provide ultimate insulation, though with their own limitations.
- 4. Swiss exposure: With Switzerland already showing willingness to chart an independent sanctions course, Swiss-domiciled funds may offer additional jurisdictional diversification.
The VTB Warning: Operational Risk Matters
The experience of VTB Bank’s European operations offers the clearest warning. Despite having a Frankfurt base and presumably following EU regulations, the Russian parent company’s sanctions status made continued operations impossible. The bank didn’t withdraw, it was forced out.
If US authorities targeted BlackRock or Vanguard’s European operations, the same dynamic could unfold. European subsidiaries might find themselves unable to access US-based trading, clearing, or asset services. The legal entity’s location becomes irrelevant when the parent is cut off from global markets.
Recent reports that the US government is considering measures against German authorities demonstrate how quickly financial tensions can escalate. When Washington discusses sanctions against German officials for domestic surveillance practices, it’s a short step to financial restrictions.
What Actually Happens in a Trading Ban
If US-EU tensions reached the point where US securities couldn’t be traded in Europe, several concrete outcomes would likely occur:
- Immediate suspension: European exchanges would delist US-focused ETFs, citing inability to create/redem units.
- NAV decoupling: The net asset value of existing ETF shares would become theoretical, as no mechanism would exist to arbitrage price discrepancies.
- Forced holding period: Investors would own shares in funds that couldn’t transact, similar to Russian equity holders after February 2022.
- Eventual write-downs: Without a resolution path, accounting standards might require treating these positions as impaired.
The key insight is that your assets wouldn’t vanish, but their liquidity and valuation mechanisms would. You’d own something you couldn’t sell at a reliable price.
The 20% Problem
One counterpoint frequently raised deserves attention: Only about 20 percent of EU citizens hold any form of equities. This makes retail investors politically expendable. Governments might sacrifice access to US markets for broader geopolitical goals, knowing most voters wouldn’t notice or care.
The concentration of equity ownership among wealthier, more politically connected individuals provides some protection, but not certainty. When sanctions against Russia were discussed, European energy dependence created a powerful lobby. Retail equity ownership lacks similar concentrated power.
Practical Steps for European Investors
Rather than abandoning US markets, consider these measured responses:
- Audit your jurisdictional exposure: Calculate what percentage of your portfolio depends on US market access, not just US companies.
- Stress-test your broker: Understand whether your brokerage has direct US market access or routes through EU entities. The latter provides slightly more protection.
- Maintain emergency liquidity: Keep 6-12 months of expenses in instruments that don’t require US market access, EU government bonds, physical cash equivalents.
- Document everything: In a crisis, proving ownership becomes crucial. Maintain records of all transactions, statements, and prospectuses.
- Follow the German corporate response: Observe how large German companies navigate US-EU tensions. Their legal and financial strategies often reveal practical workarounds before they become public knowledge.
The Liberation Day Lesson
When the “Liberation Day” concept entered discussions about reducing US dependency, it prompted portfolio rethinking. The core principle applies here: Identify critical dependencies and develop alternatives before they’re needed.
For ETF investors, this doesn’t mean selling everything and buying gold bars. It means understanding that your MSCI World ETF represents not just companies, but a legal and political framework that assumes continued US-EU cooperation.
The Greenland controversy may fade. The underlying jurisdictional risk won’t. Your portfolio’s resilience depends on acknowledging dependencies that most financial analysis ignores. In German financial planning, we talk about “Vorsorge”, preparation. This is Vorsorge for a scenario that seems impossible until it isn’t.
