By: Spencer Israel
The MiFID II regulations that came into effect at the beginning of 2018 have changed the way European investors invest in U.S.-listed ETFs.
MiFID II, or Markets in Financial Instruments Directive II, was enacted by the European Union to create more protections for European investors. One of those protections is the regulation of PRIIPs, or Packaged Retail Investment and Insurance Products.
The category of investments that can be categorized as PRIIPs is broad, and includes any marketed security with exposure to an underlying asset. To comply with the regulation, fund providers are required to create a standardized “key information document” that gives investors details on a fund’s risk factors, costs, and loss potential.
But two years later, most U.S. ETF providers have chosen not to make their funds compliant with the regulation, which has in turn made European brokerages unable to offer those products to clients.
As JustETF noted, many U.S. ETF issuers have chosen not to comply with the new regulation, “as they mostly serve the US market, producing EU-approved information at their own cost is not a priority.” Some U.S. fund providers have created European equivalents of their U.S. funds—these are known as UCITS ETFs—but these tend to have higher expense ratios and are less liquid than the U.S. versions.
This has created a dilemma for European investors seeking to invest in the U.S. ETF market, which rose to over $4 trillion in assets in November. With European brokerages unable to offer ETFs not in compliance with MiFID II, the vast majority European retail investors are locked out of investing in U.S. funds.
Some European brokers allow a “sophisticated investor” exemption to this rule if the client works in the financial services industry, has a high account balance, or has experience buying and selling ETFs. But for everyone else, the new regulation has prompted those who want to trade U.S. ETF’s to come to U.S. brokerages, though even that has proven more difficult for some.
In August, Charles Schwab announced that clients in the EU, including the U.K., would no longer be able to buy U.S.-based ETFs—though clients would be allowed to retain or sell their existing holdings.
In most cases however, European investors can still invest in U.S.-listed ETFs and ETNs, though they need to find an alternative option to their domestic broker in order to do so.
They should also be aware that the added layer of creating an account at a U.S. brokerage can create other risks such as exchange fees, extra taxes, and additional regulations.
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