UCITS and ETF – What’s in it for you?

The European Union is making UCITS directives since many years (dating back to 1985). With many amendments added to the UCITS directives both individual investors and providers benefit of the UCITS directive.

For investors it all boils down to financial products that have to comply to a number of rules. For providers of financial products such as ETF’s it means that the UCITS label opens up the whole EU for them.

Why ETF’s use the UCITS label

In order to comply with financial rules and regulations in the EU a provider of investment products may opt for a UCITS or AIFMD license. In order to aim your product to individual investor a UCITS license is obligatory.

That is why most (if not all) ETF providers chose to operate under the UCITS banner. The AIFMD license only allows them to sell ETF’s to professional customers. As we all know ETF’s are vastly popular with individual investors so not complying with UCITS would not be very wise.

What are the benefits of UCITS for ETF investors?

The main benefit for an ETF investor is that a UCITS ETF is an ETF that complies to rules that provides a certain level of security to your investment. Many rules are implied when an ETF is offered under the UCITS license. Here we will explore some of the major UCITS rules that are beneficial to individual ETF investors:

20% rule for UCITS ETF’s

A UCITS ETF may only invest up to 20% of net assets issued by the same provider. In some cases this percentage may go up to 35% but in general this limits the possibilities of using the funds of customers for investments that benefit the same provider.

Diversification rule

If the ETF is an index ETF the maximum weighting of 1 asset may be 20% or 35% in some exceptional cases. This makes sure that risks are spread widely.

The index that is tracked must be published in an accessible way

If a UCITS ETF is tracking an index this rule makes sure that this index is widely available to the public. So you as an ETF investor should be able to see and verify such an index in an easy and accessible way.

Rules regarding tracking information

A UCITS ETF provider should always make clear how they track the index and underlying assets. They should make clear whether tracking is done in a full or sample based physical replication or that they use a synthetic way of tracking the ETF.

Explanations about ETF leverage

If a leveraged ETF is offered the ETF provider should make clear how this leverage is being achieved and what kind of risk is involved. They should also make clear how results may vary from the index it tracks.

UCITS as an international brand for ETF’s

Today all major ETF issuers use the UCITS license to enter the EU market. For them it does not only provide access to the large European investor market. It also provides a trustworthy label that allows for larger assets flowing in.

So it really is a win-win to both investors and providers. But, of course, a UCITS label does not imply that you do not run any risk anymore. Of course investing is all about risks and returns.

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