Exchange traded funds (ETFs) have come into the spotlight following their excellent performance in maintaining and gathering new assets during the financial crisis. The active versus passive debate has swung in favour of products employing passive strategies, such as ETFs, as investors ask why active investment managers are demanding higher pay when consistent market outperformance isn’t achieved.
ETFs have been domiciled in Ireland since 1999 and now have assets under management in excess of €44bn. We have seen the range and sophistication of the Irish domiciled ETFs grow dramatically. Irish service providers and the Irish Financial Regulator now have considerable experience and this expertise is helping Ireland move to the forefront of European domiciles for ETFs.
Development of ETFs
Traditionally, ETFs tracked well known equity indices, providing investors with a return that closely matched the return of the relevant index by directly holding the constituents of the index in the same weightings as the index. ETF products developed to then track indices by synthetically replicating the index performance through the use of total return swaps. Synthetic ETFs argue they carry a lower tracking error (i.e. the difference between the performance of the index and the ETF) than traditional ETFs, whilst direct holding ETFs argue they offer less risk.
Possibilities for the Future
The products offered through ETFs continue to develop with more concentrated sectoral, industry and geographic indices and with increasing commodity offerings. In addition ETF products can offer active ETFs, however while active ETFs have been established in the United States and in Canada, difficulties in bridging the gap between the transparency of ETF portfolio information versus the sensitive nature of an active funds’ portfolio information and a limited market demand for such ETFs, have delayed growth of the active ETFs in Europe.
Ireland’s ETF Experience
The experience which Irish service providers and the Irish Financial Regulator have gained since ETFs were first established in Ireland is invaluable. By choosing Ireland, new entrants to the ETF arena can tap into this pool of knowledge and ETF provider will be working with a knowledgeable regulator that is open to considering new and novel product features.
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