Benefits of a UCITS ETF

Paul Heffernan: Hello. My name is Paul Heffernan, and I lead the ETF business at Waystone. We talk to investment managers every single day about entering the European ETF market, and on the back of these discussions, we decided to bring you a series of short videos where we’re going to talk through the trends and opportunities in this very exciting industry, an industry that is shaping the future of investment funds today. We hope you enjoy our thoughts.

Henry Glynn: Hi. I’m Henry Glynn, and I lead the ETF distribution and capital markets team for Waystone. I’m joined with Paul Heffernan today to discuss the benefits of UCITS ETFs. Before we talk about the asset manager, let’s talk about the advantages of an ETF to the end investor.

Benefits of ETFs for Investors

Paul Heffernan: Yeah, thanks Henry. The benefits of ETFs to an investor, they are well understood in ETF circles. And while there are many benefits, I’d like to call out what we’d see as the top three or four.

So, first of all, accessibility. Every investor that has a brokerage account can trade ETFs, and they get intraday access to those ETFs. So, throughout the trading day, at any time, investors can get in and out of an ETF. That’s number one.

Number two I would say is pricing, instant pricing of an ETF. Unlike a mutual fund, when an investor trades a mutual fund, typically they won’t know what the price they’re getting for that trade until the following day. Whereas with an ETF you get intraday pricing, so it’s price certainty for the investor.

The third thing I’d call out is performance. Particularly for investors that are getting access to the U.S. equity positions, there’s a tax benefit for ETFs versus a mutual fund, which means investors have better performance in their portfolio by investing through ETFs.

And then finally, costs. ETFs operate on what’s called a total expense ratio basis, which is in effect a fee cap. That gives cost certainty to investors for their holdings in ETFs.

And there’s what I’d say is the four main benefits.

Advantages of ETFs for Asset Managers

Henry Glynn: And well documented, for those of us that work in the ETF industry. The one that’s not talked about as frequently, and we highlight for a number of managers almost on a daily basis, is the advantages for asset managers entering the ETF space. There’s particularly a lot of active managers looking to enter the space. Can you tell us a little bit about the advantages for the asset manager?

Paul Heffernan: Yeah. And this is the benefits of the ETF wrapper that’s actually not publicised as much, and when we have those conversations, as you say, with our clients, they’re quite often surprised about the benefits that the wrapper delivers for their business. And I broadly categorize them in three buckets.

First of all, distribution. I mean, distribution is key to any asset management business. And the distribution opportunity that ETFs open, first of all, it opens up to new channels of investors, particularly in digital channels, where you see on a daily basis the growth of online platforms. Much linked to the accessibility point for investors, investors are trading these ETFs through online platforms, and asset managers are getting access to that distribution channel. So there’s a huge distribution opportunity, and the growth in those markets are only set to continue at a significant pace in the coming years. That’s distribution.

The second is investment performance. Ultimately, I mentioned in terms of the tax benefits for ETFs versus a mutual fund, if investment managers can deliver improved investment performance, that’s more attractive to investors. So therefore, they’re delivering better performance, and it’s better for portfolio managers to be able to showcase that with investors.

Tax Advantages of Irish Domicile ETFs

Henry Glynn: You mentioned the tax advantages. Is that something that’s open to all ETFs?

Paul Heffernan: Well, the largest ETF domicile in Europe is Ireland, and there’s a number of reasons for that, okay? There’s historical reasons, there’s an ETF ecosystem, whether it’s regulators or service providers, that deeply understand the ETF ecosystem, the ETF technology. But there is also a tax advantage in particular for Irish domicile ETFs, where they hold U.S. equity positions and they pay dividends, it benefits from a lower withholding tax versus the mutual fund wrapper. So, the performance point that I make is more relevant to Irish ETFs than other domiciles.

Henry Glynn: That’s from the Irish-U.S. double tax treaty, right?

Paul Heffernan: That’s correct. That’s correct.

Operational Efficiency in ETF Management

Paul Heffernan: And then, the final thing I’d say in terms of the benefit for asset managers is operational efficiency. Because of the primary secondary market, the create/redeem activity that happens, it simplifies the day-to-day operations for investment managers, from a portfolio trading perspective. And then, what’s the biggest benefit from an operational perspective is the whole AML KYC burden.

Henry Glynn: That’s something that people don’t talk about as much, really.

Paul Heffernan: No, they don’t. Absolutely they don’t. At a mutual fund level that AML KYC at the end investor is dealt with at the TA level. However, with an ETF, that’s pushed down at the brokerage level, and therefore, you don’t have the same level of concern and operational issues that you might face with a mutual fund. And quite often when you tease that out with asset managers, they’re surprised when they learn about that benefit, and they can see how much that can actually reduce their cost burden from a product manufacturing perspective.

Henry Glynn: Cost burden, the headache as well, right?

Paul Heffernan: Exactly.

Concluding Remarks

Henry Glynn: The benefits to the ETF are well documented. We went through there some of the advantages for the asset manager. Very insightful, Paul, and thanks for speaking with me today.

Paul Heffernan: Thanks, Henry.