Global analytics firm Cerulli Associates believes that Ireland is seizing the opportunity of dominating the European ETF industry and attempting to widen its lead as Europe's top domicile for ETFs.
The firm dismisses Luxembourg's attempt to win ground in this arena by its scrapping the subscription tax for ETFs as too little, too late. It is also sceptical about the UK observing that it is doubtful that the UK’s scrapping of stamp duty on ETF trading will enhance London's hopes of becoming a serious domicile player for the index-linked funds anytime soon.
The firm reports that flows into Dublin-domiciled ETFs accounted for 85 per cent of all European ETF flows in 2014, while assets under management (AUM) in Dublin ETFs has tripled since the end of 2011, to stand at EUR223 billion (USD250 billion). AUM in other domiciles rose 56 per cent over this period.
Cerulli notes that tax advantages, infrastructure and a history of delivery for asset management companies all work to Ireland’s advantage when it comes to a choice of domicile. It contends that factors such as the absence of tax on investment funds, and Ireland's strong taxation treaties with other countries, notably the United States, are crucial considerations for investors choosing ETFs.
The firm observes that while the phrase 'ETF price war' may have become a cliché, companies such as Vanguard, one of the biggest ETF players, are looking to undercut rivals. “Last year it slashed the charge for one of its Dublin-domiciled S&P 500 UCITS ETFs to seven basis points. With costs in this sort of bracket, tax differences will be keenly felt," says Barbara Wall, Europe research director at Cerulli.
She notes that for some companies, the difference is enough to justify moving ETFs from their existing Luxembourg domicile. Deutsche Asset & Wealth Management is in the process of changing much of its ETF range from synthetic to physical. The latter are often seen as easier to understand. But by moving the domicile to Ireland at the same time, it can realize tax advantages not available in Luxembourg. It has announced the closures of several Luxembourg funds, including products tracking the S&P 500, which will be merged into Irish funds.
Brian Gorman, an analyst with Cerulli, notes that after gaining Irish domicile, the next stop for many ETFs is the Irish Stock Exchange (ISE). "Although the ISE offers limited scope for trading, an ETF can then quickly gain admission to trading on the London Stock Exchange, the biggest and most liquid market in Europe. The cost of access via this route is much lower than taking the direct option. Many providers are choosing to trade their ETFs across a range of stock markets."