Fall in regulatory barriers

Regulatory changes are driving the rise of active ETFs in various jurisdictions. The removal of the subscription tax, disclosure frequency changes and simplified procedures for creating new share classes¹ in Luxembourg have made it easier for issuers to enter the market.

Product innovation

Active ETFs are benefiting from technological advancements and new investment strategies (as active ETFs can employ a variety of investment strategies, appealing to a broader range of investor preferences and risk tolerances) which is leading to increased diversification. Innovative products like single-stock ETFs, buffer ETFs, and digital asset exchange-traded products (ETPs)² are gaining traction. However, it is worth noting that Luxembourg ETFs can only – unless in exceptional cases – invest in crypto or digital ETFs if they are classified as financial instruments.

Simplified entry

The ETF market is becoming more accessible, enabling firms of all sizes to launch new products. Luxembourg offers a flexible regulatory framework that permits UCITS funds to create ETF share classes, providing a competitive advantage over other countries. Increasing interest from institutional investors in active ETFs has also contributed to their popularity, as these entities seek to enhance their portfolios with active management.

Cost and flexibility

Active ETFs have lower expense ratios than traditional funds. With lower fees, efficient structures, and tax advantages (compared to traditional actively managed funds) which makes them more appealing to cost-conscious investors. 

Besides that active ETFs offer the ability to trade throughout the day like stocks, providing investors with flexibility and liquidity that traditional mutual funds do not offer.

1. Applicable only in the context of the creation of (a) new share(s) whose characteristics are already defined in the current version of the fund’s prospectus, and which, therefore, do(es) not require a prospectus update.
2. Exchange-traded products.

Luxembourg has enhanced its appeal to active ETF issuers by removing the subscription tax, making it a competitive jurisdiction for fund launches. The country offers a favorable tax regime, with access to over 80 double taxation treaties (of which 63 are applicable to funds), reducing withholding tax burdens for investors.

The regulatory framework allows actively managed UCITS ETFs to disclose their holdings monthly, balancing investor protection and fund managers’ intellectual property. Efficient approval processes enable quick market entry, with the flexibility to create ETF share classes within existing fund structures or convert traditional funds into ETFs.

Entrance of more players

The active ETF market has become as varied as the UCITS fund market, encompassing different asset classes and strategies. This includes research-enhanced indexing, along with unconstrained and thematic strategies. The entrance of more players into the ETF market and possible market consolidation could affect dynamics and profitability of funds.

Risk of cannibalizing existing traditional fund range

As firms endeavor to expand their share of the ETF market, they must also consider the potential risk of "cannibalizing" their existing active fund portfolios. This concern stems from the direct competition posed by active ETFs and the pricing disparity in comparison to traditional fund offerings, especially amongst comparable products.

Process change enhancements

One of the biggest challenges in the active ETF business (compared to standard traditional fund management) is liquidity management and ongoing demand for managing purchases and redemptions based on a layer of active and highly timely and accurate data. This requires that participants must also be closely connected to ensure accurate operations. 

Such a complex operational set-up needs to be established and maintained and is by far more complex than a standard traditional fund set-up.