Ireland: European ETF Hub - Ireland | Legal ServicesIreland: European ETF Hub European ETFs had...
Transcript of Ireland: European ETF Hub - Ireland | Legal ServicesIreland: European ETF Hub European ETFs had...
Ireland: European ETF Hub
European ETFs had almost US$475 billion in assets under management at the end of February 2015
and approximately half of that is held by Irish domiciled funds. However, perhaps the most impressive
aspect of the European ETF market is its potential for future growth, with some projections expecting
the market to treble in size by the end of the decade. The good news is that Ireland is well positioned
to harness this potential.
ETFs are a type of investment fund, typically established as corporate vehicles and authorised under
the UCITS Directive, which provides an EU-wide framework for funds which are suitable for retail
investors but available to all.
Where ETFs differ from most other funds is that their shares may be purchased or sold on a stock
exchange, through a broker, in the same way as any other publicly traded security. This can result in
significant advantages for the investor, such as the ability to trade throughout the day when markets
are open and to trade directly with the market, which contrasts with the more traditional fund model of
buying and selling shares through the fund itself and on the fund’s own timetable. Irish ETFs also
benefit from all of the tax and other advantages which are available to Irish funds generally.
Advantages of ETFs
A typical ETF provides a passive exposure to the performance of an index, which brings two principal
benefits: transparency and cost. Where they are replicating a publicly available index and therefore
not concerned about protecting a proprietary investment strategy, ETFs are typically happy to offer a
much more information about their holdings than a traditional fund provider and to update it throughout
each business day. In addition, because of the potential for savings on investment management
intellectual capital and the large size of many of the major Irish-domiciled funds, ETFs are typically
available with very low management fees. Recent years have seen fierce competition between the
major players in the ETF market on price, so that investment management fees for many of the more
popular products have been reduced significantly.
These features, among others, have made ETFs increasing popular among investors and the sector
has seen consistent and substantial growth over. Over the last ten years European assets under
management has increased by a cumulative annual average of just under 30% and was up more than
7% for the first two months of 2015 alone.
Innovation
Unsurprisingly, this growth has led to a lot of innovation, as product developers start to push out the
boundaries of what ETFs are used for. “Smart Beta” is a catch-all term, which has become almost
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ubiquitous in ETF circles and is used to describe indices which may be tracked by ETFs which are
constructed on non-traditional lines, such as the dividend yield, earnings or share buybacks of
constituents, instead of basic market capitalisation. Providers are also using Irish ETFs to give access
to new geographical markets, such as China and India and to new asset classes, such as convertible
bonds. However, the role which ETFs could play in active investment management may yet be the
most significant development for these funds in the next five years.
Active managers are typically those that seek to implement their own investment strategy through
investment selection in an effort to outperform the broader market, while passive managers try to
replicate the performance of a given market or index and not necessarily to beat it. Active managers
have been investing in ETFs for years to achieve particular exposures that they think will deliver their
strategy and desired returns, but they are now increasingly starting to consider the benefits of
structuring their products as ETFs themselves. This will require some work, as active managers are
often reluctant to provide the sort of transparency in respect of their holdings which is seen as
necessary for public market trading in an ETF to function properly, for fear of giving away proprietary
information. However, these concerns should not prove insurmountable and Ireland is already moving
to create an appropriately balanced market and regulatory environment to encourage this next stage.
Indeed, given the vast experience of its service providers and regulators of working with cutting edge
products and implementing innovative solutions to industry problems, Ireland is in prime place to
support these innovations and continue its position at the centre of the ETF market in Europe.
This article was first published in Business and Finance in May 2015: www.businessandfinance.com.
Please get in touch with your usual Asset Management and Investment Funds Group contact or any of
the contacts listed in this publication should you require further information in relation to the material
referred to in this update.
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