Regulatory activity around actively managed ETFs has been busy in recent months with tax and portfolio transparency topping the agenda, but are regulators jostling for position in a bid secure assets, or are jurisdictions taking a more cautious approach to avoid regulatory divergence?
So far in recent months, whispers emerged from Irish lawyers that the Central Bank of Ireland (CBI) would look into ETF portfolio transparency rules as early as this year.
France quickly followed, with the Autorité des Marchés Financiers (AMF) saying issuers could publish holdings “at least once a month” to avoid other players from replicating the strategy.
Luxembourg then announced actively managed ETFs domiciled in the region would be exempt from subscription tax after 2025, as it looks to become the domicile of choice for active ETF issuers.
The regulatory tweaks are well timed given that active ETFs have raked in inflows of $6.8bn in the first half of 2024, gathering well over half of these assets - $4.5bn - in Q2, according to Morningstar data.
Luxembourg tweaks to get active share
In July, it was announced that actively managed ETFs domiciled in Luxembourg will be exempt from subscription tax after 2025.
Luxembourg’s move to exempt active ETFs from subscription tax was approved by the Council of Government on 17 July and comes after Finance Minister Gilles Roth announced his intention in March.
Roth has previously said he hoped the move would help to harness the growth of the active ETF space by offering favourable tax benefits.
The Dutchy has a huge fund management industry, worth roughly €5.1trn at the end of September 2023, but remains some way off in the ETF space, dominated by Ireland.
In the active ETF space, the move might make Luxembourg more attractive, but still lags someway behind Ireland’s favourable tax benefits for US equities which are subject to a 15% rather than a 30% withholding tax on US equity dividends.
Alain Goebel, tax partner at Arendt said while the preferred domicile of an ETF is dependent on many factors, “the proposed changes are definitely improving the competitiveness of Luxembourg in this respect”.
James O'Neal, co-head of tax at Maples and Calder Luxembourg, added the changes highlight the fact that the region is “making necessary changes to ensure the jurisdiction is an optimal location for international business and investment".
Enough to move the needle for France?
France’s financial regulator has suggested allowing issuers to disclose their holdings “at least once a month” to prevent other players from replicating their strategies.
However, Ciara O’Leary partner at Dechert, said that it is “hard to say” whether this will move the needle on attracting active managers to France.
“Most of the ETF conversations we have with people, they either say that they are going to Ireland and the odd time there is a consideration of Luxembourg.”
O’Leary added despite France being home to large asset managers like Amundi, the changes might not be enough to move the needle fully and it is hard to tell if all the economic activity would go to France.
Sergey Dolomanov, partner at William Fry, added that it is “not a given” that active activity will go to France if the AMF does loosen portfolio transparency rules.
“If the changes were to take place, it would not particularly make a dent anyway,” he added.
Further to this, there is a school of thought that allowing non-transparent ETFs are not necessary for issuers to consider entering the European ETF market.
Not the same for Ireland
Contrasting Luxembourg’s approach of overtly changing regulation to attract active share, Dolomanov believes the CBI would most likely not change regulation surrounding active ETF transparency to attract ETF issuers to the region.
This could be tied to Ireland’s already dominant position in housing ETFs in Europe, with Ireland holding $1.1trn assets under management in exchange traded products compared to $305bn in Luxembourg, as at the end of October 2023, according to data from ETFbook.
“If they wanted to do it, they would just go and do it,” Dolomanov said. “The CBI sees it in the best interest of the Capital Markets Union and each individual member state to ensure a level playing field and avoid regulatory arbitrage.”
Dolomanov added that if the CBI were to change rules to attract active share, “it would be for short term perceived gain and looking over a medium to long term horizon it would not be the correct approach.”
Ultimately, issuers will consider whole picture
When issuers are considering where to domicile their ETF they “need to look at everything” Dolomanov concluded.
“For example, importance might instead be placed on the financial regulator being familiar with ETF ecosystem around and the service providers who are familiar with servicing ETFs. Therefore, established jurisdictions lend themselves to that,” he added.
“I believe the new entrants will consider all factors comprehensively, rather than overlooking other important aspects that are crucial to operating a successful product.”
