ETFs Link & learn May 18, 2017

Transcription

1 ETFs Link & learn May 18, 2017

2 Speakers Jack Lee Director Financial Services Audit and EMEA ETF Lead Deloitte Ireland E: T: Derina Bannon Manager Legal and Regulatory ETF Expert Deloitte Ireland E: dbannon@deloitte.ie T: Seamus Kennedy Senior Manager ETF Tax Expert Deloitte Ireland E: seakennedy@deloitte.ie T: Guillaume Brousse Director Audit and EFT Lead Deloitte Luxembourg E: gbrousse@deloitte.lu T:

3 Agenda 01 Growth of ETFs in Europe 02 ETFs themes in governance 03 Tax Landscape for ETFs 04 The future for ETFs What s next - new generation of products 3

4 Growth of ETFs in Europe 4

5 ETF Landscape European ETF asset growth as at Feb 2017 ETFs have witnessed a significant growth in past years due to: Diversification of market risk in a single vehicle Very competitive cost structure Mostly well regulated Wide product range and underlying products Strong liquidity resulting in narrow spreads Ability to deal intra day 5

6 ETF Landscape European ETF - Largest listing markets VS largest domicile Wide difference between domicile and listing places. Ireland and Luxembourg are clearly domicile of choice UK and GE are clearly listing countries France is listing French domiciled ETF Swiss and Italy are listing local products and foreign ones. 6

7 Inverse Active Mixed Leveraged Inverse Currency Leveraged Alternative Equity Commodities Fixed Income Inverse Active Mixed Leveraged Inverse Currency Leveraged Alternative Equity Commodities Fixed Income ETF Landscape ETFs by asset class: Europe Sept-16 net new assets by exposure type (US$m) # flows US$m # flows US$m YTD net new assets by exposure type (US$m) Net Inflows Sept-16 (US$m) YTD net inflows (US$m) 2,000 1,500 1, ,000 23,000 18,000 13,000 8,000 3, ,000 Net inflows of US$2,983m. Three largest inflows: Fixed income - US$1,153m Equity - US$1,037m; and Commodities - US$667m. Largest net outflows - Active - US$53m. YTD net inflows of US$41,542m. Three largest inflows: Fixed income - US$26,498m; Commodity - US$12,154m, Leveraged inverse - US$1,229m, Largest net outflows YTD Active - US$110m. 7

8 ishares db x/db ETC Lyxor AM UBS ETFs Amundi ETF Vanguard Source ETF Securities SPDR ETFs Commerzbank Deka ZKB HSBC/Hang Seng BNP Paribas Easy XACT Swiss & Global PowerShares Ossiam Think ETFs Societe Gen ETF Landscape ETF providers by assets: Europe Provider Assets (in US$ Million) Sept-16 # ETFs % Market Share NNA (US$ Mn) YTD 2016 # New ETFs Launched ishares 266, % 25, db x/db ETC 61, % - 2, Lyxor AM 51, % UBS ETFs 29, % 1, Amundi ETF 23, % 1,433 5 Vanguard 23, % 2,997 4 Source 22, % 1,576 6 ETF Securities 19, % 5,015 1 SPDR ETFs 17, % 3, Commerzbank 8, % Deka 8, % ZKB 7, % HSBC/Hang Seng 5, % BNP Paribas Easy 4, % XACT 3, % Swiss & Global 2, % PowerShares 2, % Ossiam 2, % 9 1 Think ETFs 1, % 2 1 Societe Gen 1, % ETF providers by assets: Europe # Assets US$m # ETFs 300, , , , ,000 50,000 - Chart Title Assets (in US$ Million) Sept-16 # ETFs Top 5 providers with new ETFs launched in 2016 SPDR ETFs - 21 BNP Paribas - 18 db x/db ETC - 17 UBS ETFs 13 Lyxor AM

9 ETF Landscape Total expense ratios: Europe Average Total Expense Ratio # Assets US$bn # ETFs Average TER (bps) Asset class ETFs Equity 32 Fixed Income 26 Commodities 44 Alternative 77 Mixed 65 Active 34 Inverse 32 Leveraged 46 Leveraged Inverse 42 All TER (bps) #ETFs ETF assets (US$ Bn) Average expense ratio of 31 bps. Cheapest products track fixed income indices at 26 bps Most expensive are alternative ETFs at 77 bps. 48 ETFs with an expense ratio less than 10 bps 43 ETFs with an expense ratio greater than 80 bps. 9

10 ETF Operations and type of strategies Simple but complex 10

11 ETF Operations and type of management styles ETF Definition Open-ended funds providing daily portfolio transparency The investment objective of most ETFs is to generate returns that closely correspond to the performance of an established index (tracker fund) Could be a regular fund Listing on a stock exchange with the legal structure of a Fund Listed and traded on exchanges like stocks on a secondary basis as well as utilising a unique creation and redemption process for primary transactions Primary market: Large institutions create/redeem shares through in-kind transactions Unique to an ETF Secondary market: no subscription fees, no sales charges upon purchase/lower cost but investors pay brokerage commissions to buy or sell 11

12 ETF Operations and type of management styles Management styles Investment in all or portion of the shares of the benchmark and on going adjustments to ensure adequacy Investment in a basket of shares + gain of the index performance through derivatives (SWAPS) PHYSICAL REPLICATION SYNTHETIC REPLICATION 12

13 ETF Operations and type of management styles Physical vs synthetic After the economic crisis growth in AuM of Synthetic ETFs was almost stabilised. The growth in AuM of Physical ETFs increased substantially since 2011 In 2017 approximately 80% of European ETF AUM is represented by synthetic replication There are more Synthetic than Physical ETFs Since 2012 the number of Synthetic ETFs decreased, whereas the number of Physical ETFs increased steadily 13

14 ETF Operations and type of management styles Drivers for Growth in ETFs LOW COST TRACKING TRANSPARENCY DIVERSIFICATION TRADING FLEXIBILITY LIQUIDITY 14

15 Governance and ETFs Themes in Governance 15

16 Governance and ETFs Overview Good governance can add value as it enables stakeholders to have confidence in the decision-making processes and management of ETF. To foster market confidence it is important that ETF Boards ensure that investors are protected while encouraging innovation and investment in an increasingly complex, uncertain and ever-changing market Exchange Traded Funds ( ETF market) have grown in both complexity and popularity as an investment option Heighted attention on the area of governance WHY? The landscape has evolved and developments such as globalisation, digitisation, innovation and regulation are contributing to a changing market and are shifting risk profiles. Fiduciary Stewardship 16

17 Governance and ETFs New Waves of Regulation The level of local and European regulatory pressure is set to remain intense. As a result, regulation should continue to remain high on board agendas, with focus on a number of new regulatory developments : 1. European Union Fourth Anti-Money Laundering Directive is the European Union s most recent response to the threat of the financial system being used for money laundering and terrorist financing purposes. It sets out a risk based approach and detailed framework which ETFs must comply with to effectively manage their money laundering and terrorist financing risks. It is increasingly common for Boards to undertake training on AML/CTF to ensure that they are aware of the requirements and responsibilities under this regulation. ETF Boards will not be able to rely on third parties to conduct elements of customer due diligence, and will need to ensure and evidence effective on-going monitoring of investor transactions. Member states must implement the directive into domestic legislation by June examples 2 General Data Protection Regulation ( GDPR ) is directly applicable in EU member states and is due to come into force in May It will both update and overhaul data protection law. The new regulation aims to remove red tape for businesses but also tighten privacy protections for online users. Practically speaking, this means that boards of ETF fund companies and asset managers will have to proactively plan their strategies to deal with the new requirements and obligations under the GDPR. Fines of up to 4% of global turnover (or 20 million whichever is higher) will be imposed for breaches. Boards and Audit Committees will need to understand their new roles and the responsibilities created, in addition to compliance requirements and privacy risks. ETF Boards must ensure effective oversight of these areas is fully embedded into their governance structure. 17

18 Governance and ETFs New waves of regulation : the tide shows no sign of turning Aside from Boards getting to grips with specific new regulations. They will also need to ensure that they fully understand the global and local regulatory landscape The associated risks And how they will impact the ETF market. Managing regulatory cost And dealing with regulatory constraints are expected to be part of long journey ahead in 2017 and should be a key consideratio n for Boards 18

19 Governance and ETF s Evolving Board responsibilities and demonstrating execution of these responsibilities should be a key priority for Boards going forward Boards are not only expected to focus on their traditional fiduciary responsibilities such as monitoring performance, risk and compliance, they must also effectively provide effective stewardship through helping shape and advise on areas such as culture, innovation and cyber security. Culture Regulators are interested in Board oversight of culture. For an ETF Board, this will include the culture within the ETF and its service providers, particularly the investment manager, and how this culture is promoting and protecting investors interests. Innovation ETF Boards are tasked with overseeing the operation and suitability of new and innovative ETFs. This should include shaping and supporting the development of more active ETFs products in response to investor appetite and in line with the pace of technologic change. For example, FinTech, which provides data analytics to produce product comparisons and online distribution platforms. While a critical role of EFT Boards relates to its role as monitor of legal and fiduciary duties, this role is changing.. Cyber Security This new technology and innovation bring market opportunities. They also present new risks, such as cyber security risk, which continues to be an area of focus for regulators throughout the EU. While the applicability of some of the measures to mitigate these risks will depend on the structure and set up of the ETF, ETF Boards should ensure that they understand the cyber security risks and controls in place, both at an internal and external third party level, are effectively overseeing them. 19

20 Governance and ETFs Overseeing Risk : A Key theme for ETF Boards As we see the complexity of ETF products increase and different areas of the market open, the risk profile of ETFs are undoubtedly increasing. Continued focus on the protection of investors and effectively understanding and overseeing risk in the context of the ETF market. All risks all need to be considered and given equal attention : exposure to complex strategies and competition as the market expands, as well as the risk profile of the underlying securities. A Key theme for ETF Boards and the key to effective oversight of risk is the implementation of an effective governance framework which enables the Board to make intelligent risk decisions while protecting the interests of investment fund investors outsource risk relating to service providers The key to effective oversight of risk is the implementation of an effective governance framework which enables the Board to make intelligent risk decisions while protecting the interests of investment fund investors 20

21 Governance and ETFs Enhanced Accountability Investors are reiterating the premise that ETF Boards should be accountable to their shareholders, and are actively seeking engagement on a number of topics such as the composition of the board. Investor engagement is equally important for passively managed funds, which accounts the majority of ETFs, as well as actively managed funds. We are also seeing legislation and regulation being used as a tool to enhance accountability. For example, in Ireland the introduction of a Directors Compliance Statement under the Companies Act 2014 requires Directors to acknowledge responsibility for ensuring compliance with relevant obligations under the Act to include: tax, serious market abuse offences and serious prospectus offences. This requirement is of direct relevance to ETFs which are established as PLC s under the Irish UCITS Regulations. Increased transparency Transparency is a key principle of good governance and ensures that all stakeholders are well informed about the fund s activities, future strategies and any associated risks.. Disclosure is a key mechanism for promoting the sharing of relevant and timely information to investors. The Disclosure Guidance and Transparency Rules require ETFs listed on the main market of the London Stock Exchange ( LSE ) to include certain corporate governance disclosures, such as description of the main features of the internal control and risk management systems in relation to the financial reporting process. In addition, the Financial Reporting Council s ( FRCs ) 2014 Code of Corporate Governance (the Code ) introduced changes to disclosure in three principal areas: going concern and longer term viability; risk management and internal control; and remuneration and shareholder engagement. There have been limited updates to the 2016 Code as the FRC expressed views that there is still further work to do regarding enhancing the disclosures relating to the 2014 Code. EFT Boards listed on the LSE, or Main Securities Market in the Irish Stock Exchange, will need to review their disclosure across these areas to understand any aspects that can be improved. 21

22 Governance and ETFs Key takeaways 1 ETF Boards need to ensure that they are being provided with frequent and comprehensive regulatory updates, and undertaking training on regulatory matter throughout the year. 2 To ensure effective understanding of risk they should be conducting an extensive risk review on an annual basis to identify the risks attached to the ETF itself, as well as the risks attached to the servicing or operation of the ETF, and assigning ownership of each risk. These risks should be monitored by the Board regularly through the year. 3 Board agendas and forward plans need to evolve to cover all evolving Board responsibilities. Topics such as cyber risk and culture should feature as standalone agenda items at least once per year. Alongside this, Boards should be receiving high quality information to enable robust discussion on areas such as risk management, investment strategy, innovation and culture. 4 There should be a cyber security policy in place that is monitored by the Board on an on-going basis. 5 Boards should be clear on the type and level of communications with stakeholders and ensure that they have effective mechanisms in place to engage with investors on key topics. 6 The quality and level of governance disclosure in Annual Report and Accounts is an area that we believe requires improvement 22

23 Tax Landscape for ETFs 23

24 The Tax Landscape for ETFs ETFs & Tax - The Perfect World No tax at the level of the ETF Access to Double Tax Treaties reduced rates of WHT / Exemptions from CGT Perfect World No withholding tax on payments from the ETF to investors 24

25 The Tax Landscape for ETFs ETFs & Tax - The Real World 1. At investor level: 2. At investment level: Daily tax Tax registration Annual tax Ad-hoc Austria - OeKB DDI Distribution reporting Belgium B-TIS Ruling upon request Streaming (FCP) Subscription Tax Chile Asset test Denmark - Application Reportable Income - France - - Germany AKG I, AKG II, IG, ZG WM-Daten Italy - - PEA / Taper relief /couponnage DDI 5, 18 and 19, ADDI IRRP/ Capital vs. income split - Distribution reporting Inheritance Norway Asset Test - Asset test SSA Sweden - SKV 2745 KU Forms - Switzerland - - Muster reporting - UK Equalisation Application Excess RI Asset Test U.S. Computation 8865 (CTB) / EIN / State PFIC / K1 / FIN 48 Investor Reporting Monitoring and calculation of capital gains and tax exposure on a daily, monthly or quarterly basis (FIN 48 / ASC ) Preparation of transfer pricing documentation and transfer pricing guidelines Internal guidance and controls to address and confirm whether an uncertain tax position exists; Preparation of a return of income and filing Considering the taxation of sale transactions Preparation and filing of tax statements to tax authority or custodian Stamp duty and other potential tax liabilities Tax reclaims 3. At fund level: Tax structuring/advice Tax compliance/filing VAT Country by Country Reporting 25

26 The Tax Landscape for ETFs The reformed German Investment Tax Act Main categories of funds as of 1st of January 2018 Investment funds (mutual funds) article 1 section 2 of the draft law Investment funds (special funds) just open to up to 100 institutional investors (article 26 of the draft law) Funds under the legal form of a partnership (Non- UCITS) Opaque taxation system Tax transparency Out-of-Scope of the revised German Investment Tax Act General German tax law applicable No annual & daily reporting %-rate for exemption purposes Daily and annual reporting required 26

27 The Tax Landscape for ETFs The reformed German Investment Tax Act - Overview The reform of the GITA introduces two independent taxation systems: Investment Funds (e.g. ETFs): opaque taxation system Special Investment Funds: option to continue the principle of tax transparency Investment Funds Level of the Investment Fund German and non-german Investment Funds are subject to German corporate tax with the following types of income German sourced dividends and equivalents German sourced real estate income and gains In the case of certain eligible investors, the Investment Fund can enjoy a tax exemption (complex procedure) Full exemption from German corporate income tax possible if the terms and conditions of the Investment Fund rule that solely tax-exempt investors are entitled to invest Level of the investor Investors are taxed on (i) distributions, (ii) the pre-lump sum amount and (iii) on capital gains from the disposal of investment units Special Investment Funds Basically, Special Investment Funds are subject to German corporate tax like Investment Funds A Special Investment Fund can however opt for tax transparency and continue the current taxation system with however significant modifications Attribution of income and expenses to the German investors on a pro rata temporis basis Stringent requirements as regards the composition of distributions New definition of the deemed distributed income New rules in relation to the computation of the daily tax reporting figures Introduction of a new daily tax reporting figure (Fonds-Teilfreistellungsgewinn) A partial tax exemption rate can apply, depending on the investor type and investment strategy The applicability of the partial tax exemption rates depends on the ongoing investment of the Investment Fund pursuant to its constitutive documents 27

28 The Tax Landscape for ETFs The reformed German Investment Tax Act Most important tasks Review and revise constitutive documents in order to make sure that partial tax exemption rates apply Monitor the portfolio of the Investment Fund in order to make sure that German corporate tax returns are prepared and filed with the fiscal authorities where necessary Apply for status certificate to benefit from a reduced German WHT rate incl. management of WHT Explore whether or not there is a need to implement a process for the partial exemption of the Investment Fund from German corporate tax Review whether or not it is reasonable to launch Investment Funds and share classes respectively which can enjoy a full exemption from German corporate tax Team involved: Sales ; PM; Legal; Operations; Products 28

29 The Tax Landscape for ETFs Brexit Implications for Asset Managers On Brexit, the UK will likely lose the ability to passport management and distribution functions into Europe Alternative jurisdictions considered will depend on existing commercial structures and operations both for funds and corporate group activities Tax will likely follow regulatory considerations 17 Jan: PM speech Art EU Exit (in case of no extension) Exit negotiations Clarity on exit scenario (e.g. clean Brexit) Comparison of tax rates and regimes Selection Implementati on Adapt Tax authority attitudes FS specific taxes Rules on employee benefits (e.g. pensions) and remuneration Cost of moving vs ongoing tax cost Define optimal final structure How to move (CBM, TOGC) Substance requirements Impact on employees tax and policy design and reward structures New intercompany agreements Branch / sub registrations TP update VAT position Systems and reporting / compliance Employees implementation of new policy/structure tax developments and potential impact on business CRS / FATCA clearances Reacting to tax implications of future business changes Ongoing compliant BAU embedded Ongoing monitoring of 29

30 The Tax Landscape for ETFs Brexit implications for Fund management Fund Management Companies (ManCos) A key consideration will be the ability to subdelegate back to existing UK functions and exit charges around transfer of contracts Current position maybe: UK Funds and UK Mancos Pre-Brexit UK ManCo Post-Brexit Lux/Irish ManCo Future considerations post Brexit: Non-UK Funds and Non-UK ManCos IM Contract IM Contract Popular jurisdictions considered: Luxembourg and Ireland Issues: tax and regulatory consequences UK and Foreign Funds Foreign Fund 30

31 The Tax Landscape for ETFs Dutch Fiscal Investment Institution (FII) A Dutch Fiscal Investment Institution ETF offers investors a tax efficient alternative for the FII and retail investors. 1) A Fiscal Investment Institution ( FII ) is subject to Corporate Income Tax (CIT) (at 0%) - can access most Dutch Double Tax Treaties. i.e. EU retail Private investor Private investor TOTAL CASHFLOW Receipts by private investor: 15 tax credit against personal income tax liability for Dutch WHT* 85 nett dividend 100 total nett received 2) Dividends are generally subject to withholding tax (WHT) in the source state. Under most Dutch Double Tax Treaties, the tax rate on dividends or bonds received by the FII is reduced to 15% (e.g. the US-NL DTT). 3) Netherlands-based Fiscal Investment Institutions are entitled to relief for foreign dividend WHT. Such WHT may be credited against the NL dividend WHT due at the time of distribution to shareholders (payment relief) => the FII does not have to pay the deducted WHT to the tax authorities. This results in a profit for the fund and the FII can distribute 100% of the gross received dividends. 4) There is a 15% WHT on the dividend of the NL FII (albeit that this WHT isn t actually paid to the Tax Authorities due to the aforementioned payment relief). e.g. Dutch private investor can claim credit for this WHT fully with the Personal Income Tax due or can request a (full) refund of the deducted WHT deducted. (The same might apply for EU private investors.) 5) The Double Tax Treaty rates, combined with the payment relief and the tax credit or refund at the private investor level should enable many investors to receive foreign dividends without any tax leakage. Netherlands e.g. United States NL FII (0% CIT) US (high) dividend equity investments At fund level: 100 gross dividend (85 nett received + 15 'tax refund'** for foreign WHT) -/-15 Dutch withholding tax 85 nett dividend Dividend payment: 100 gross dividend -/-15 foreign withholding tax (NB 15% = applicable Tax Treaty rate) 85 nett dividend * A full credit will be available for Dutch private investors. Please note that if the NL WHT cannot be fully credited by EU (non NL) private investors under the domestic law of the residence state, it may on the basis of NL law (partially) refundable in NL ** Subject to certain conditions the FII can claim a payment relief for the (foreign) withholding taxes that were withheld in the source country. As a result of this payment relief, an FII usually does not need to pay the Tax Administration the full amount of dividend withholding tax withheld. The difference between the Dutch WHT withheld by the FII and the amount to be paid to the Dutch Tax Authorities represents profit for the FII. 31

32 What s next new generation of products Innovation driven industry 32

33 What s next new generation of products SMART BETA ETFs Smart beta defines a set of investment strategies that emphasize the use of alternative index construction rules to traditional market capitalization based indices. Smart beta emphasizes capturing investment factors or market inefficiencies in a rules-based and transparent way. The increased popularity of smart beta is linked to a desire for portfolio risk management and diversification along factor dimensions as well as seeking to enhance risk-adjusted returns above cap-weighted indices Source: Investopedia Bn USD invest in Smart Beta Equity ETF (Feb 2017) 39 Bn USD in Europe 18% growth and 30% CAGR over 5 year Even if the product if attractive to investors, they consider it as an add-on to their portfolio but share is increasing 78% still have less than 5% in Smart Beta ETF (85% in 2015) 19% have between 5 and 20% (11% in 2015) Source: BBH 2016 European Investor Survey 33

34 What s next new generation of products Active ETFs An exchange-traded fund that has a manager or team making decisions on the underlying portfolio allocation or otherwise not following a passive investment strategy. An actively managed ETF will have a benchmark index, but managers may change sector allocations, market-time trades or deviate from the index as they see fit. This produces investment returns that will not perfectly mirror the underlying index. Source: Assets (MUSD) 45,000 40,000 Global Actively managed ETF 25% annual growth over last 3 years mainly US In Europe, 21 ETF of which 2 represent 75% 35,000 30,000 25,000 20,000 15,000 10,000 Asia Pacific Canada Europe US Very concentrated 1 provider (Source PIMCO) representing 90% in Europe TER lower than active mutual funds 36bps average 5, Discussion in process on transparency requirements that could limit growth 34

35 What s next new generation of products ESG ETF New trends (COP21, green bonds, SDGs, climate change, ) Increasing client demands being institutional or individuals ask for SDG related actions, UNPRI, low carbon products Reporting requirements on climate change are coming and will develop UN PRI signatories will have to implement further to principles and demonstrate their effective investments Index providers to ensure Need for better reporting and not more Harmonization in the standards to ensure comparability Outputs from various working groups at EU and UN levels are expected Increasing role of the stock exchanges to promote those investments Return is not less than standard ETF 35

36 What s next new generation of products Robot advisors and ETFs? Robo-Advisory ($50 bn) Robo-Advisory ($2.2 $3.7 tn) Robo-Advisory ($16 tn) +740% +432% Global AuM ~$75 tn Global AuM ~$102 tn Global AuM ~$137 tn +36% +34% * 2025* Expected Growth in Assets under Management (AuM)** * Estimated forecast ** Assets managed globally by Wealth and Asset Management firms Sources: Bloomberg, Deloitte Research 36

37 What s next new generation of products Robot advisors and ETFs? Active Management Ongoing data collection and analysis of the market Proposes (optional) shifts in asset allocation Aiming at outperforming the market Passive Management Based on pre-defined parameters Frequently restoring the predefined asset mix Taking human emotion out of investment-decisions Aiming at long-term growth in analogy with the market ETF provider are looking for new way of distribution Robot provide low cost solution 2 options have been growing since 2 years: ~42%* of Robo-Advisors with pure active management ~25%* of Robo-Advisors with pure passive management Besides, ~19 %* of Robo-Advisors offer both options. Clients can choose between active and passive management styles. * Based on a Deloitte analysis of the Robo-Advisory landscape with over 70 Robo-Advisors in These figures do not include Robo-Advisors that do not manage portfolios for their client because they only suggest trades on request. - Acquiring/partnering with an existing robo-advisor (BR, Lyxor, ) - Building its own robo with dedicated team (Deutsche, Charles Schwabb, ) 37

38 What s next new generation of products Market trends FT - May 3, 2017 FT August 26,

39 Questions? 39

40 Next Link n Learn Date: June 8 th 2017 Topic: Corporate Governance 40

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