Exchange-traded funds (ETFs) are gaining in popularity, and growth was particularly strong in Luxembourg last year. Unusually, though, the grand duchy is the number two European domicile for these type of funds.
Although similar to standard funds in many ways, ETFs are markedly different in that their shares are traded like stock on exchanges. Otherwise they are similar to standard products by tracking stock indices, commodities, bonds and other baskets of assets. They are growing in popularity because they have lower fees than standard products and are relatively easy to buy and sell. In particular, this makes these products work well with “robo advisors”, the increasingly popular tools that feature computer algorithms which build portfolios based on investors’ risk/reward preferences.
Ireland is the leading domicile for ETFs in Europe, although Luxembourg has narrowed the gap. At the end of the third quarter of 2018, Dublin accounted for 57.7% of the total compared to 25.9% for Luxembourg, according to figures from the European Fund and Asset Management Association (PDF). Dublin’s share was virtually unchanged on twelve months previously but Luxembourg’s was up by nine percentage points from 16.8% in 2017.
Much of Luxembourg’s growth appears to have come at the expense of the other two significant domiciles: France and Germany. They saw their market shares drop over this period from 14.5% to 7.1% and 9.6% to 7.7% respectively. Moreover, this was in a growing market, with total assets under management in Europe at €681bn at the end of Q3 2018, up 17.1% over 12 months.
The end of year figures might tell a different story, however. Efama figures pointed to 80.8% growth for Luxembourg ETF assets in the twelve months to the end of Q3. But the Association of the Luxembourg Fund Industry gave growth of 56% for 2018 as a whole, as these funds suffered from the end of year market turbulence. Nevertheless, this compares very favourably to the 2.3% decline in net assets under management for the sector as a whole in Luxembourg.
However, these numbers cannot really be compared as the ETF figure was boosted by the domiciliation of funds to Luxembourg, mainly from France. This included French asset manager Lyxor which transferred 19 exchange traded funds with assets of €4.9bn to Luxembourg towards the end of last year. This followed a similar moves by the firm in previous years. “The rationale has been very much client demand. Many of our investors across Europe tell us Luxembourg is a simple domicile for them to deal with,” said Adam Laird, head of ETF strategy for northern Europe at Lyxor, quoted by Luxembourg for Finance.
ETFs remain a relatively small niche, accounting for 6.8% of all European domiciled Ucits at the end of Q3 2018, up 0.6 of a percentage point over the 12 months. ETFs represented 4.1% of Luxembourg fund assets at this time.
Luxembourg finds itself in the unusual position of trailing Ireland in this fund businesses. This is largely because the grand duchy used to levy a subscription tax on these products while Ireland did not. This sector is dominated by a handful of players, and most chose Dublin some years ago, and there has been no pressing need for them to consider switching.