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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