Issuers targeting institutional investors in Latin America (LatAm) via the UCITS ETF structure are struggling to gain the scale in Europe required to access them.
The UCITS wrapper is considered attractive by LatAm investors due to its gold standard regulatory and governance structure, as well as privileged tax status on US equity dividends.
Relative to ‘40 Act’ ETFs in the US, UCITS vehicles in certain European jurisdictions have lower withholding tax rates on distributions from US companies presenting a tax advantage to LatAm investors.
Ben Slavin, global head of ETFs at BNY, told ETF Stream that issuers have designed UCITS ETFs with Latin America as part of their distribution strategy, “however, the path to raise assets in LatAm will be limited if they cannot scale the products in Europe since many institutional investors have ownership restrictions.”
“The opportunities for distribution in LatAM are growing, but it is not a substitute for a clear approach to European distribution, which will allow the ETF to scale and build a performance track record to attract assets abroad,” he added.
As of 30 June, just 229 EU-domiciled ETFs were registered for distribution in LatAm, according to PwC.
The list is heavily dominated by scale players, with BlackRock, Invesco, JP Morgan Asset Management (JPMAM), UBS, DWS, Vanguard, Legal & General Investment (LGIM) and AXA Investment Managers (AXA IM) the only issuers to have registrations in the region.
The LatAm market is also heavily tilted towards passive, Slavin noted.
“The adoption of active remains in its infancy…there currently remains a small subset of actively managed products that are either approved and-or large enough to attract meaningful flows from LatAM institutions,” he explained.
For Slavin, issuers should focus on developing products that can gather assets in Europe and look at LatAm as a “bonus”.
