Kyle Frasca, EY Luxembourg Partner, Assurance  -  Pierre-Marie Boul, EY Luxembourg Partner, Assurance  -  Argjent Kastrati, EY Luxembourg Manager, Assurance (Photo: EY Luxembourg)

Kyle Frasca, EY Luxembourg Partner, Assurance  -  Pierre-Marie Boul, EY Luxembourg Partner, Assurance  -  Argjent Kastrati, EY Luxembourg Manager, Assurance  (Photo: EY Luxembourg)

For years, exchange-traded funds (ETFs) have been synonymous with passive investment strategies, tracking indices with low fees and broad market exposure. However, as financial markets become more volatile and investors seek more agile strategies, actively managed ETFs are gaining traction. While still a small portion of the European ETF market – just over 2% – this segment is experiencing significant growth.

A market on the move

The numbers tell a compelling story: BlackRock reports that 41% of all new ETFs launched in the first half of 2024 were actively managed, a trend primarily driven by the US, but gaining – and sometimes correlated to – momentum in Europe. ETF assets in Luxembourg already reached $384.2 billion in 2024, and with the market shift toward active management, this figure is set to grow significantly. Already the continent’s dominant hub for active fund management, the country offers fund managers an ideal environment to replicate their investment strategies in ETF form.

Recent strategic initiatives, including the abolition of the 0.05% annual subscription tax on actively managed ETFs, combined with Luxembourg’s established financial ecosystem and strategic location, open a window of opportunity in the active ETF landscape. While in recent months we have seen some ETFs being shifted from Luxembourg to other jurisdictions due to more favorable tax treaties – namely with the US – we hope to soon see an evolution as a result of the latest positive tax changes.

Recent changes in tax paving the way

Tax treatment is a key factor in ETF adoption, and Luxembourg has taken a decisive step to attract active ETF issuers, with the law to remove the subscription tax on active ETFs, published on 24 December 2024. This levels the playing field between passive and active ETFs, eliminating a cost barrier and making Luxembourg an even more attractive jurisdiction for fund launches.

Beyond this immediate advantage, Luxembourg’s tax regime provides structural benefits that reinforce its appeal. ETFs structured as SICAVs can access more than 55 double taxation treaties, reducing withholding tax burdens and enhancing net returns for investors. Compared to certain European jurisdictions, Luxembourg offers a highly efficient framework for ETF domiciliation, solidifying its status as a premier destination for active ETF growth.

New transparency regime

One of the historical barriers to active ETFs has been the need for frequent portfolio disclosure, which fund managers worry could expose proprietary strategies to competitors. Luxembourg’s regulatory framework addresses this challenge with a pragmatic approach. Under the latest CSSF clarification, actively managed UCITS ETFs need only disclose their holdings at least monthly, with a maximum time lag of one month. This strikes a balance between investor protection and safeguarding fund managers’ intellectual property.

The new transparency regime not only provides a clear pathway for active ETF adoption but also creates a regulatory “safe harbor,” reducing uncertainty and encouraging more managers to enter the market.

Streamlined approvals and structural innovation

Luxembourg’s regulatory framework is designed for efficiency, offering shorter approval timelines that facilitate faster market entry. A key advantage is the ability to establish ETF and non-ETF share classes within the same UCITS compartment. This means fund managers can introduce an ETF share class within an existing fund structure, leveraging operational synergies and expanding distribution channels without needing a separate vehicle.

Additionally, Luxembourg permits mutual funds to convert into ETFs – a crucial feature as more asset managers look to transition existing strategies into an ETF wrapper.

The next frontier for active ETFs

As active ETFs continue to gain traction, Luxembourg is positioning itself as the leading jurisdiction for their expansion in Europe. With a powerful combination of tax advantages, regulatory flexibility, and efficient fund structures, the country offers the ideal ecosystem for both established and emerging asset managers looking to enter the active ETF space.

Stay tuned! In our next article, we will delve into the significant growth potential for active ETFs in Luxembourg, examining the trends and opportunities that are shaping this dynamic market.

EY regularly publishes research on ETF development. For a detailed look out at our newly launched technical analysis into the accelerating ETF market, read our article  

, EY Luxembourg Partner, Assurance

, EY Luxembourg Partner, Assurance

, EY Luxembourg Manager, Assurance

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BlackRock forecasts active ETF assets will hit $4tn by 2030, Financial Times, 22 July

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