Fund managers are beefing up their exchange-traded fund (ETF) ranges, to judge from a recent flurry of product launches. Luxembourg’s fund industry faces a dual threat: these ETFs launched in Ireland and are taking market share from traditional Ucits mutual funds, its core product.
Both Paris-based AXA Investment Management and Boston-based Fidelity Investments have recently launched products offering active management and research at a lower cost.
AXA in the summer launched a fixed-income Ucits ETF enabling sustainable investing through the Paris-aligned benchmark. Unlike simple index trackers, it is actively managed, with a 20 basis point fee. This comes nearly 15 years after the firm sold its ETF division to current competitor BNP Paribas AM.
The Paris-aligned benchmark involves a 7 percent year-on-year target with a 50 percent target for reducing carbon by 2050.
Fidelity has recently launched two corporate bond euro and dollar ETFs. Fidelity’s head of ETF distribution Stefan Kuhn differentiated them from simple exchange “trackers’. “They are index-based, where the research is embedded into the index.” The research, he explained, is Fidelity’s own in-house product. The firm offers these funds with a 25 basis point fee.
Just a market
Luxembourg is, however, just a market for all these ETFs, explained senior AXA and Fidelity executives passing through the Grand Duchy in recent weeks. Both firms took advantage of Ireland’s more favourable ICAV withholding tax regime to register the fund. Fidelity started basing its ETFs in Ireland six years ago.
“If you’re considering launching an equity ETF, which has a component of US equity, the natural choice is for an Irish domicile because of exactly that withholding tax benefit,” explained Fidelity International director Dorcas Phillips
Olivier Paquier, global head of ETF sales at AXA, gave the two main reasons for choosing Ireland. “First, the Irish regulation is quite clear for every single ETF provider.” He explained that for him, the tax treaties that Ireland has signed with countries including the US are secondary in importance.
Ecosystem importance
“There’s a tax advantage at the vehicle level, for the same exposure, to be regulated by the Irish regulator,” Paquier continued.
But he also pointed to “the importance of the ecosystem that exists in Ireland, but does not exist yet in Luxembourg, around ETFs.”
There are also cultural/linguistic reasons for Ireland’s advantage. “the ETF market is dominated by global players that most often happen to come from the US,”, which largely speaks English.
Fair balance disturbed
Fidelity’s Philips explained that historically, there was a “fair balance” between Luxembourg and Ireland.
“We’ve definitely kind of seen that rotation to Ireland which was supported by the move away from synthetic ETFs,” she said. “Synthetic ETFs, by their very nature, don’t have to be concerned about the individual withholding tax rate.”
Luxembourg regulators have to face up to this change in the nature of ETFs, she said.
“I think it’s about adoption of the regulators in terms of less vanilla exposures, the fixed income space is a good example of that,” she ventured. “It’s about understanding the evolution of the structure, the evolution of active ETFs into Europe.
Losing market share
On top of fund jurisdiction concerns, there’s a shift away from the main product of the Luxembourg fund industry - the Ucit, otherwise known as “mutual funds”.
“The real question is, why would you invest in a mutual fund when you have the same thing in an ETF?,” asked AXA’s Paquier., He explained that ETFs offer more liquidity options and greater transparency.
All ETFs launched in the EU have to be Ucits compliant, he explained, objecting to the “abuse of language” of referring to mutual funds as “Ucits”.
Rapid growth
A recent PwC study showed that ETFs are growing twice as fast as traditional mutual-fund-type Ucits investments. It said that EU-domiciled ETFs have grown at a compound annual growth rate of 18.2 percent, twice the growth rate of 9 percent for EU-domiciled Ucits funds, during the same period.
Why is the shift happening? Paquier and Kuhn said it’s partly about costs. “The cost structure of an ETF is extremely efficient said Paquier. “We make the same amount of money as an asset management company selling a mutual fund or an ETF. But from a client perspective, the approach to cost is much more efficient in an ETF, not because ETFs are cheaper. That’s not true. But because ETFs give you an upfront cost.”
Paquier explained that investors can buy ETFs online, where clients are informed about the total expense ratio. “It’s the same total expense ratio for my grandmother, or the government of Luxembourg.” He pointed out that all you need to know is the four-letter ticker code.