Paperjam: What explains the success of ETF fund domiciliation in Ireland?

Serge Weyland: ETFs account for €2.3trn in assets under management in Europe. The asset class has seen significant net flows thanks largely to equities coming from traditional asset management companies. Ireland is the domicile for €1.5trn of those €2.3trn. The success of Ireland’s ETF business can be summarised in one word: Blackrock. It holds the lion share with €1trn and monopolises all the flows. It is a winner-takes-all market.

That [global ETFs] are a promise of diversification is less true than in the past for the S&P 500, and even for the MSCI World, where almost 70% of the equities are invested in US companies. Besides, the Magnificent Seven [all of which are American] account for 25% of the index. This is a crazy development. The problem is that it represents a risk concentration.

Luxembourg has a more diversified asset manager base with players such as Amundi, Xtrackers, BNP and UBS. Luxembourg accounts for 25% of the overall ETF market.

Will the money in passive ETFs stick?

Through discussion with the traditional asset management industry, we’ve observed that there are long-term building blocks allocated to passive ETFs when managers are constructing portfolios. It also means that the money is gone for good from active management.

I believe that the active asset management industry has a role to play in terms of diversification and reduction of idiosyncratic risks. It remains to be seen how these ETFs will behave in a brutal market reversal. Active asset management may then show its credentials.

Is the US 15% tax rate on dividends a strong pull in favour of Ireland?

Ireland has had its successes with MSCI World and S&P 500 passive ETFs thanks largely to a more favourable double taxation treaty (DTT) between the US and Ireland on US dividends [15% against 30% for Luxembourg]. We are as efficient in Luxembourg in developing ETFs as in Ireland. Luxembourg had its shares of successes such ETFs based on the MSCI Europe or emerging markets indices.

Amundi uses Ireland for MSCI World and the S&P 500 while all the rest is in Luxembourg. It is annoying to Amundi to domicile some funds in Ireland. It is a necessary evil.

If you want to compete against a Blackrock’s IShares core S&P 500 with $114bn in AUM and its very low total expense ratio (TER), it’s difficult not to be in Ireland. With a similar fund with €20bn in AUM, Amundi cannot afford tax frictions compared to Blackrock. These minimal basis points do not make a big difference for most investors, but they do for fund selectors.

How can the double taxation treaty be efficiently handled?

I understand that it is possible to get the benefit of the 15% through a synthetic replication of an index. Besides, I recently compared the performance of a Luxembourg synthetic ETF with and an Irish ETF [asset managers not reported by Weyland], both based on the MSCI World. I concluded that the performance of the former was better than the latter.

As the dividend on the S&P 500 is around 1.5%, the 15% difference amounts to only 22 basis points. The problem is that there are several fees in the value chain such as execution cost that are not always reflected in the TER calculation. The outcome of a working group that included large players on ETFs was that the DTT was not a deciding factor anymore.

Are synthetic ETFs growing faster than ETFs replicated with shares?

No, significant studies have been undertaken on that topic at Alfi. Both have advantages and disadvantages.

Any governmental discussions on changing the DTT?

There is no intention to reopen the double taxation treaty with the US. It is time-consuming and complex. The UK tried unsuccessfully to reopen their treaty with the US.

What advantages does Luxembourg offer or could it offer that cannot be imitated by Ireland?

Luxembourg has €7.3trn in Ucits and its alternative investment fund business accounts for more than one-third of the total AUM thanks to an acceleration of inflows in AIFs.

Many players that have moved to Ireland have been constrained to rebuild operations in Luxembourg given that all the larger asset managers are developing alternative businesses. Ireland does not offer solutions and will not catch up.

Neuberger Berman, for instance, has all its liquid offering in Ireland but had to reopen in Luxembourg given the growth in their alternative products. Everything they do in Ireland could be done in Luxembourg. Should I be the boss of one of those firms, I would consider addressing such an issue to avoid multiplying expenses.

That is why several firms such as JP Morgan Asset Management and Fidelity have established their operations in Luxembourg while supervising Irish funds.

All the groups are developing the alternative investment business as it is not with 5 or 10 bps of management fees in passive ETFs that you will greatly develop your business even if you manage several hundreds of billions of dollars.

An ETF can be seen as a distribution channel as many large mutual funds are not available on online banks such as Trade Republic. These AM companies can resolve that shortcoming by issuing an ETF share class with the same name as the fund, contrary to Ireland.

Moreover, a great success by Alfi in its negotiation with the [Luxembourg financial regulator] CSSF was achieved when the latter agreed not to require the daily publication of the underlying assets. The daily publication will continue for the authorised participants to hedge their positions whereas the market will get them with a delay of one month. It provides comfort to asset managers when it comes to illiquid underlying assets, for instance. Ireland has talked much about making changes but has not changed much.

How do you explain the great success of passive ETFs but also, increasingly, the active ETFs in Ireland?

One must dig into what we call “active ETFs” from asset managers such as JPM or Nordea as it is not pure active asset management. They offer something more akin to smart beta or systematic which is not really active asset management. The correlation of their funds is very close to passive funds.

Yet there are only seven active ETFs domiciled in Luxembourg in February 2025, according to Morningstar. What could be done to improve those stats?

We have not really seen the development of ETFs on active asset management.

JPMAM and Fidelity claim to offer active ETFs with a net performance target of around 100bps per year. We can’t have an outperformance with a very low tracking error, right?

I think that those are new strategies. We have not seen players yet with traditional active asset management strategies that are launching an active ETF share class. They will come and we expect these active ETFs to be launched in Luxembourg as these mutual funds are already in the country. Asset managers risk cannibalising their current channel. The goal is to add new assets.

What does Ireland offer that can be replicated or improved in Luxembourg?

Thanks to a large volume in ETFs Ireland has managed to standardise processes with legal experts among others.

In cooperation with the CSSF and legal advisors, we can now help more efficiently asset management companies to navigate the Luxembourg ecosystem and identify ETF experts. Besides, Luxembourg is the home of service providers such as custodian banks capable of serving large ETF managers.

In the last 10 years, Luxembourg has made significant inroads in developing competencies and substance at management companies while Ireland slowly wakes up to the topic. The Irish regulator is in fact quite nervous on the matter.

It is often easier to keep a client than to gain one. Is Luxembourg doing anything to keep its current players in the country?

We work a lot with the government which understands the challenges of the financial sector. For instance, it has recently improved the tax package for expats.

There are several other advantages for asset managers such as the second pillar on pension benefits, deductions on trainings, deductions and even subsidies on innovations related to AI, etc.

Do you see more front office activities in the country?

Alfi is working on initiatives to increase the number of front office roles. At alternative asset managers, it’s starting to pay off with support functions for the front office such as global fund financing teams, deal screening experts, with some players even having deal teams in Luxembourg.

Whatever the topic, we very often end up talking about alternative investments. Why?

I believe that more M&A activity should be expected at large management firms. There are several private equity firms confronted with succession issues. It has created opportunities for traditional asset managers such as Franklin Templeton and Blackrock recently.

Once a unified group, Blackstone and Blackrock split in 1995. Blackrock has started to offer private investment funds. What is the status at Blackstone?

Blackstone has also started to offer liquid strategies.

View from a custodian bank

“Luxembourg has taken great strides to ease the barriers to entry for both active investors and prospective active ETF Issuers in recent times,” Ken Shaw, head of ETF solutions in EMEA for State Street, told Paperjam.

“The three most significant differentiators for the Luxembourg ETF industry [compared to Ireland], are (1) the ability to launch a listed share class of an existing unlisted fund, (2) the ability to launch semi-transparent active ETFs and (3) expertise in synthetic ETF servicing.”

“These benefits should result in prospective issuers, with a local active presence in particular, considering a Lux-first strategy.”

An alternative version of this article was written for the published on 25 March  2025. The content of the magazine is produced exclusively for the magazine. It is published on the website as a contribution to the complete Paperjam archive. Click here to subscribe to the magazine.

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