Introduced at the turn of the century, exchange-traded funds (ETFs) are now driving much of the growth in funds investing across the entire EU landscape, particularly so in Ireland.
Since the debut of the EU’s first exchange-traded fund in 2000, the Republic has emerged as the leading European base for ETF issuers by demonstrating a keen ability to identify and leverage global investor interest in ETFs. In fact, ETFs domiciled in the State currently account for approximately 73 per cent of the EU’s total ETF market.
Tony O‘Brien, chief commercial officer for Ireland with US Bank Global Fund Services, explains that at the core of any ETF is a well-established investment framework, a UCITS (undertakings for collective investment in transferable securities).
“UCITS are meant to provide a standardised regulatory environment for investments across the EU, ensuring investor protection and facilitating cross-border distribution,” O‘Brien says.
Unlike regular UCITS, however, the shares of an ETF are listed and traded across the EU’s major exchanges.
“This means that the products tend to be highly liquid, as they have appointed market makers who are contracted to constantly provide bids and offer prices throughout the day,” he says.
“They are also very transparent, as they are based on UCITS rules and can therefore only hold long positions in actively traded stocks and bonds and are limited in derivatives use.”
ETFs also publish their holdings to the market on a regular basis, typically daily.
Oisin McClenaghan is a partner and heads the investment funds team at Ogier in Dublin. He explains that with typically lower expenses relative to mutual funds, ETFs provide a straightforward and cost efficient way for investors to achieve returns. McClenaghan also notes that one of the key advantages and contributing factors to the State‘s popularity as a domicile for ETFs is the comprehensive network of double taxation treaties it has in place.
“Among these, the double taxation treaty with the United States stands out, generally reducing the withholding tax on US dividends from 30 per cent to 15 per cent for Irish ETFs investing in US equities,” he says.
ETFs can be actively managed or passive, as McClenaghan explains: “Unlike passive ETFs that track a specific index, like the S&P 500 or the FTSE 100, active ETFs have portfolio managers who make decisions about asset selection and allocation with the goal of outperforming a benchmark or achieving specific investment objectives.”
This approach allows for greater flexibility and responsiveness to market conditions. The range and variety of active ETFs available is growing, thus enabling investors to customise their portfolios in line with their particular risk profiles and investment objectives.
A number of other trends have also contributed to the popularity and growth in ETFs, says McClenaghan, including demand from retail investors for ETFs and growing demand for actively managed ETFs.
“This popularity and growth in ETFs is set to continue for the foreseeable future, with assets in European ETFs forecast to rise 15 per cent annually until 2030.”
ETFs also generally have lower management fees compared to traditional actively managed funds, making them an attractive option for cost-conscious investors, says Nicola Sheridan, tax director, financial services, at PwC Ireland.
“These lower management fees, alongside the rise of digital platforms, have also made the accessibility of ETFs an attractive option to a new cohort of young investors offering an opportunity to have investments professionally managed and generating returns at an affordable price.”
ETFs also offer investors a way to diversify their portfolios without having to buy individual assets, making them an attractive option for both retail and institutional investors.
Sheridan also highlights the potential reduction of the 41 per cent exit tax on ETFs in Ireland, as promised by Finance Minister Paschal Donohoe.
“This could also significantly benefit investors in the future by lowering their tax burden, thereby further enhancing the attractiveness and efficiency of ETFs as investment vehicles,” she says.
McClenaghan also notes a number of positive regulatory developments; most recently, the Central Bank updated its UCITS Q&A to permit ETFs to disclose portfolio holdings on a quarterly basis, meaning ETFs are no longer required to disclose portfolio holdings daily.
“The daily portfolio disclosure obligation has long been a concern of active ETF managers, fearing that their proprietary strategies, or their ‘secret sauce’, could be copied,” he says. “This update is a significant boost to Ireland’s thriving active ETF industry which continues to dominate the European ETF market.
“This enhancement also builds upon the Central Bank’s ETF rule changes introduced late last year permitting the establishment of ETF share classes in a fund without designating the fund an ETF.”
All this mirrors global trends – Sheridan points out that the recent PwC report ETFs 2029: The path to $30 trillion found that global ETF assets under management (AuM) grew by a record 27 per cent in 2024 to reach $14.6 trillion by the end of the year.
“As the findings from our survey highlight, $30 trillion in AuM is now in sight within the next five years,” she says.
Continued development of digital investment platforms, artificial intelligence, blockchain enabled tokenisation, and other disruptive technologies are opening up new direct-to-investor channels and accelerating ETF “democratisation”, Sheridan adds.
Over time, ETFs have evolved to become less a passive index tracking product and more of a “wrapper” to deliver investment strategies of all kinds in an inexpensive, transparent and liquid way, says O’Brien.
“ETFs have survived and thrived through all the financial shocks of the last 25 years and will continue to evolve as we see more strategies and assets packaged in this way,” he says.