ETFs are a major trend in the global AWM industry, attracting attention from nearly every asset manager. For those planning to launch, Luxembourg has very compelling arguments.
Most asset managers long overlooked ETFs as low-cost, index-tracking products, but the rapid rise of active ETFs has completely shifted that view. There is very strong investor demand to access active strategies also in an ETF wrapper, primarily because investors value the transparency, intra-day pricing, and intra-day trading. Institutional investors are clearly shifting assets from traditional mutual funds to active ETFs.
Luxembourg, the world’s second largest fund domicile, has in the past not been able to participate in the rise of passive ETFs in Europe in the same way as Ireland. The partial withholding tax exemption for dividends paid by US equities physically held in an Ireland-domiciled ETF makes Ireland the logical choice for plain-vanilla ETFs with large US equity exposure. Now, with the rise of active ETFs and their increasing complexity, growing demand for fixed-income strategies and synthetic replication, attempts to offer exposure to alternative investments in an ETF, and time to market as key success factor, Luxembourg is making a strong case again for hosting ETF launches:
- Strong expertise of Luxembourg’s ecosystem with active fund management, fixed-income strategies as well as synthetic products;
- “Hybrid” funds with ETF share classes next to traditional mutual fund share classes are well-established in Luxembourg and the local ecosystem is familiar with the model;
- The CSSF’s expertise in overseeing complex products proves very valuable and results in smooth approval processes and fast time to market;
- Clear cost advantage of Luxembourg with respect to ManCo fees, especially for “medium high” and “high” risk classifications;
- Strong expertise with distribution in emerging markets, such as LATAM and APAC, with above-average growth and strong preference for UCITS products.
Luxembourg is certainly back on the map for asset managers looking to launch ETFs, both for established ETF promoters seeking strategic advantages as well as for new entrants already domiciling mutual funds in the country. For the European ETF market, having multiple domiciliation options, each with distinct benefits, is a clear advantage. A healthy competition between domiciles has already proved to have considerable positive impact for promoters. One example of this was when Ireland followed Luxembourg on share class naming convention and portfolio disclosure requirements, or Luxembourg exempting active ETFs from subscription tax.
Can Luxembourg become the “nirvana” for active ETFs? That is not the main point. It is enough that asset managers across Europe are increasingly viewing Luxembourg as a strong domicile choice for at least part of their ETF range. Equally, service providers are evidently investing in the expansion and promotion of their ETF servicing capabilities in Luxembourg and play a key role in assisting asset managers. At PwC Luxembourg, we support asset managers and other market participants in assessing their options and navigating the path into the ETF space. Based on our many conversations with stakeholders across Europe, we are confident that the future for ETFs in Luxembourg looks very promising.
Marius Pfeiffer: Luxembourg ETF Leader at PwC Luxembourg
Benjamin Gauthier: Regulatory, Risk & Compliance Consulting Leader at PwC Luxembourg
This article was written in close collaboration with PwC Luxembourg.
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