Ireland is the European jurisdiction of choice for asset managers looking to establish and add to existing ETF ranges. Several factors have contributed to Ireland’s growth in the ETF space. These include our close cultural relationship with both the US and the UK and our deep pool of experienced and responsive local ETF service providers. In addition, a continued point of difference for Ireland is the availability of preferential US withholding tax treatment for Irish ETFs.
We discuss the product offering and regulatory changes which are currently in focus for ETF managers.
Buffered ETFs
On the product side, we are seeing an increased focus more recently on buffered ETFs. Buffered ETFs seek to provide collared exposure to equities using a combination of put and call options. Revenue for buffered ETFs is generated through selling call options with limited upside potential where the equities in the portfolio do not reach the relevant strike price on those options. Limited downside protection is also offered on buffered ETFs through the use of put options.
Growth of active ETFs in the EU
There has been a growing trend of traditionally mutual active managers looking to establish new ETF products or replicate existing strategies using an ETF wrapper. There have been several new active manager entrants into the EU market recently which have selected Ireland as their hub. It is also notable that there is already a significant cohort of actively managed ETFs based in Ireland. Further afield, there has been continued success for transparent active ETFs in the US where non and semi-transparent ETF portfolio disclosure options are available.
T+1 settlement
Operationally, the US alongside Mexico and Canada recently compressed their settlement timeframes for shares, fixed income instruments, ETFs and other exchanged traded securities from two days to one day. This is colloquially referred to as the move from ‘T+2’ to ‘T+1’ and reflects a broader trend across all jurisdictions in reducing settlement timeframes. The mismatch in settlement timing between the EU and the UK, which continue to trade on a T+2 basis, and the US in particular, which now trades on a T+1 basis, may create issues for those ETFs in the EU which need to comply with UCITS borrowing and cash deposit limits.
Tokenisation
Finally, the Central Bank of Ireland and Irish Funds, the industry body for funds in Ireland, are scheduled to meet in the coming weeks to discuss the possible tokenisation of share classes using blockchain technology. In the context of ETFs specifically, one of the possible use cases for tokenisation of share classes is allowing for ease of access to exchanges without having to rely on traditional brokers.
Conclusion
The continued success of Ireland as a jurisdiction of choice for ETFs is reflected in the fact that Ireland now has a 70% share of the European ETF market. This market share can be maintained or even expected to grow if:
- Inflows into Irish ETF ranges continue at their current pace
- New ETF platforms are established in Ireland, and
- Existing ETF ranges in other EU jurisdictions are re-domiciled into Ireland
For more information, please contact a member of our Investment Funds team.
The content of this article is provided for information purposes only and does not constitute legal or other advice.
