The curious case of ETF share classes in Europe

HSBC Asset Management created four ETF share classes last week

Tom Eckett

a close up of a newspaper

Asset managers are currently able to artificially increase their ETF assets under management (AUM) through the creation of ETF share classes alongside unlisted equivalents, an issue that may require further regulatory change in the future.

Last week, HSBC Asset Management became the first asset manager to launch both listed and unlisted share classes within the same Irish-domiciled fund structure.

The UK giant announced plans to convert four fixed income index funds to UCITS ETFs – set to effect on 18 May – making the firm a top 10 bond ETF issuer in Europe. HSBC AM added the move will allow investors to access ETFs with larger AUM and a longer track record.

“Our move to issue listed and unlisted share classes for these four index funds will provide additional flexibility to investors to build their portfolios,” Marco Montanari, global head of ETF and indexing capability at HSBC AM, said.

The move in Ireland is particularly significant given the Emerald isle is home to 67% of assets in the European ETF market, according to data from ETFbook.

However, it also comes with questions about the future of regulation. Current requirements from the Central Bank of Ireland (CBI) force asset managers that launch an ETF share class to rename the entire fund as an ETF.

This means the majority of these ETFs’ AUM will sit within the index fund share class despite the strategy being labelled an ETF.

“This is something that has slipped through,” Marc Knowles, director of ETF and indexing practice at Alpha FMC, told ETF Stream. “However, the ETF industry has been lobbying for [the regulation] to be changed.

“It has been possible in Ireland and Luxembourg for some time but because of this issue, not many asset managers have done it.”

The model is in stark contrast to the US where Vanguard currently has exclusive ability to create an ETF share class – without the need to label the entire fund as an ETF – a structure it patented in 2001.

Interestingly, the patent is set to expire in May meaning other ETF issuers will be able to take advantage of the feature’s benefits.

As Adrian Whelan, head of market intelligence at Brown Brothers Harriman (BBH), explained: “The development [in Europe] could bring economies of scale and lower costs for investors. It is an efficiency, customer retention and optionality play.”

However, key differences between the mutual fund and ETF structures mean the process is not a straightforward one.

In 2019, the Securities and Exchange Commission (SEC) highlighted the discrepancy between a mutual fund share class that is forced to sell when redemptions hit while an ETF can match buyers and sellers in the secondary market via market makers.

“An ETF share class that transacts with authorised participants on an in-kind basis and a mutual fund share class that transacts with shareholders on a cash basis may give rise to differing costs to the portfolio,” the SEC warned.

Overall, this is just the start of developments in Europe. Only time will tell if other ETF issuers follow HSBC AM’s lead and what impact this has on the market this side of the pond.


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