ETFs in Luxembourg: where do we really stand? 

Written in collaboration with Carla Santos, a member of The Blog team. 

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At the grand ballroom of European investment, two suitors have their eyes on the same goal—winning over asset managers for ETF domiciliation. Ireland, dressed sharply and working the room with effortless charm, smiles with its eyes—warm, knowing, and full of confidence. 

And why wouldn’t it? Ireland has firmly established itself as the leading domicile with 71.8% of European ETFs being domiciled here, as opposed to 20.5% in Luxembourg (EFAMA data). There are several factors behind this dominance—we’ll get to those shortly. While Ireland has surged ahead, Luxembourg has struggled to keep pace. Yet, the latest figures offer a glimmer of hope for the Grand Duchy, suggesting that it’s gaining traction and reinforcing its position in the ETF market. 

Side note: for a comprehensive global view of the fund distribution landscape, you can check out our ‘European ETF Listing and Distribution 2024 poster’. You may also be interested in ‘ETFs 2029: The path to $30 trillion,’ which gathers insights from over 70 executives worldwide on the rapid evolution of the global ETF sector. 

Not all is bad, of course. When combining ETFs and traditional mutual funds, Luxembourg remains the largest fund domicile in Europe. However, the trend of investors reallocating assets away from traditional liquid mutual funds (mostly in Luxembourg) to ETFs (mostly in Ireland) is a concern for local asset managers and policy makers. Now, after years of “staying on the sidelines,” Luxembourg has started to take action. 

In this blog, we’ll break down why Ireland has become the dominant ETF domicile, why Luxembourg has lagged behind, and what steps it’s taking to regain lost ground. But first, let’s take a step back to understand what exactly an ETF is, and why actively managed ETFs have become impossible for asset managers to ignore. 

What’s an Exchange-traded fund 

An ETF is simply an investment fund that is listed and traded on a stock exchange. Historically, ETFs gained popularity as passive index funds, meaning they aren’t actively managed but instead track the performance of a given index, such as the MSCI World Index or the S&P 500, at a very low cost. This structure allows investors to gain exposure to an entire market or index in a cost-effective and efficient way.  

Beyond their affordability, passive ETFs offer broad diversification, operational efficiency, low risk, and transparency, making them an attractive investment vehicle.  

Because many leading asset managers viewed ETFs purely as passive products—and saw themselves as active managers—they largely dismissed them as irrelevant to their business. That is, until actively managed ETFs started gaining traction. 

The rise of actively managed ETFs 

Actively managed ETFs have been around for years, but for a long time, they flew under the radar. While that’s changing fast, we still don’t see that many ‘truly’ active strategies being offered in an ETF. So far, most have followed a ‘semi-active’ or ‘enhanced indexing’ approach—replicating an index but making minor adjustments to generate alpha. But this is evolving, with the first prominent examples of fully active management, including high-conviction strategies, now emerging within ETFs. 

So, what defines a truly actively managed ETF? In these funds, a portfolio manager (or team) makes regular investment decisions—buying, selling, and rebalancing assets based on research, market trends, and strategic insights rather than tracking a fixed index. In this sense, the ETF serves as an operational “wrapper,” enabling investors to access nearly any kind of strategy on exchange. 

As investors realise that active strategies can be implemented in an ETF, demand is surging. What began as a slow shift has become a full-fledged trend—one that’s here to stay. But for traditional asset managers, this brings new challenges. 

Why ETFs aren’t that attractive for asset managers… 

Let’s cut to the chase. The fees on ETFs are significantly lower than those for mutual funds. This is in partly because ETFs, at the right scale, can be operated very cost-efficiently. But it’s also due to intense fee pressure—investors de facto expect ETFs to be low-cost. As a result, even with lower operational expenses, ETFs usually generate thinner profit margins compared to traditional mutual funds. 

For asset managers, this presents a dilemma: because ETFs generate thinner margins, they need much larger fund sizes to achieve the same profitability as mutual funds. That’s why many have been hesitant to launch actively managed ETFs—they worry about cannibalising their own business. If clients move their money from high-fee mutual funds to lower-fee active ETFs, revenue takes a hit. 

But here’s the catch: if you don’t offer active ETFs, clients will simply go to another provider. The cannibalisation concern is valid—margins do shrink—but refusing to adapt means losing business entirely.  

Additionally, as ETF strategies become more active, the performance of these funds increasingly depends on the portfolio manager’s decisions. As a result, the fees for active ETFs may start to better reflect the uniqueness and quality of the investment strategies offered.  

At this point, no asset manager can afford to overlook (active) ETFs. The trend is undeniable, driven by massive client demand. In the US—which often sets the pace for Europe—active ETFs have already taken off, signalling what’s likely ahead. 

…but they can’t overlook them anymore 

The market is evolving, and so are actively managed ETFs. What once were predominantly semi-active enhanced indexing strategies, continue to evolve into true active funds—increasingly featuring real investment decision-making, in-depth market research, and more frequent portfolio adjustments. 

The appeal is clear: lower costs, greater flexibility, and easier accessibility make ETFs particularly attractive to institutional investors. The numbers speak for themselves—active ETFs have been growing at an astonishing 45% annual rate globally over the past five years. As a result, many asset managers who once dismissed ETFs—saying, “This isn’t our market”—are now racing to launch their own. 

To do that, many are embracing ‘hybrid’ funds—ETF share classes within traditional mutual funds. This approach is particularly popular in Luxembourg, where service providers and regulators are already well accustomed to the model.  

While standalone ETFs create entirely new structures, the hybrid fund allows asset managers to add an ETF share class to an existing mutual fund. This approach enables them to offer both a mutual fund and an ETF under the same umbrella, sharing a common pool of assets—making it easier to seed the ETF using existing mutual fund capital. 

And where are these new ETFs being launched? While Ireland has cemented its reputation as the go-to hub for ETFs, Luxembourg—historically dominant in traditional mutual funds—is working to strengthen its foothold in the ETF space and to increase its competitiveness and attractiveness as a European ETF domicile.  

Where do Ireland’s advantages truly lie? 

Ireland’s dominance in ETFs largely comes down to one key factor: tax advantages. ETFs with exposure to US equities benefit from a special double tax treaty, reducing US withholding tax on dividends. 

All of this is a self-reinforcing ecosystem, then. Major asset managers set up shop there, which attracts top service providers, strengthens the stock exchange, fosters government support, and draws in even more talent and investment. 

Back to our analogy—if Ireland and Luxembourg were two suitors competing for asset managers’ attention, Ireland is the charismatic one. It has charm, confidence, and, most importantly, an unbeatable tax advantage*. It knows how to sell itself, and over the past decade, it has worked relentlessly to market its appeal globally. 

As the old American proverb goes, ‘The squeaky wheel gets the grease.’ Ireland, by being the louder and more promotional suitor, has captured more attention—and more ETF business. Let’s see where that leaves our quieter, more reserved suitor—Luxembourg. 

Closing the gap: Luxembourg takes action… 

While Ireland has built a strong reputation as the leading ETF domicile, Luxembourg has remained largely silent, missing the chance to position itself in this rapidly growing market. As a result, when asset managers consider launching an ETF, Ireland, in the past, has become the default choice—simply because it’s where most ETF AuM already were. 

Now, while the rise of active ETFs doesn’t mean capital will suddenly shift away from mutual funds entirely, the trend is clear: there is a great opportunity for Luxembourg, the European domicile for active mutual funds, to make up some lost ground in the ETF space. 

Over the past year, the Luxembourg government, its regulator—the Commission de Surveillance du Secteur Financier (CSSF)—industry groups like the Association of the Luxembourg Fund Industry (ALFI), and key players in the market—like us—have started to act to reposition the country as a serious contender in the ETF market.  

Recognising the need to strengthen its appeal as an ETF domicile, Luxembourg introduced new measures, including a subscription tax exemption for active ETFs—a key regulatory change passed in December 2024.   

Previously, Luxembourg’s subscription tax applied to active ETFs but not passive ones, creating an uneven playing field. While the tax itself was relatively small, for low-margin products like ETFs, it could tip the scale towards unprofitability. Meanwhile, Ireland, which never had this tax, had a clear competitive advantage. 

Now, Luxembourg has exempted both active and passive ETFs from the subscription tax. While this doesn’t create an advantage, it removes a key obstacle, putting Luxembourg on equal footing with Ireland in terms of taxation at the fund level.  

Beyond these actions, the Grand Duchy has a few distinct traits that might just charm asset managers. 

…and it has unique advantages 

One key disadvantage of ETFs for fund houses is the daily disclosure of fund holdings, which can be a challenge for active managers who don’t want their strategies easily replicated. Luxembourg’s CSSF, has made a significant move by allowing ETF managers to disclose their portfolios with a delay of up to two months—making Luxembourg the first European regulator to offer this flexibility.  

While Ireland’s regulator, the Central Bank of Ireland (CBI), may eventually follow suit, Luxembourg’s early adoption provides a distinct advantage. 

Additionally, the CSSF has introduced a fast-track approval procedure with the potential to speed up launches of new share classes, including potentially ETF share classes, provided their characteristics are already included in the fund prospectus. The Luxembourg regulator is widely regarded as efficient and mature, particularly when reviewing and approving more complex, increasingly actively managed strategies.  

The CSSF is also well-accustomed to hybrid setups such as the ETF share class model, making this an efficient and attractive option for asset managers. Unsurprisingly, industry players have noted that Luxembourg’s approval process is smooth and fast, especially when dealing with more intricate investment strategies. 

Luxembourg’s efforts to be more visible in the ETF space, together with its differentiators, are slowly but surely yielding results: asset managers are starting to look at the country for launching ETFs—especially if they already have a presence in the country and no operations in Ireland. This takes us to the next question.

Ireland or Luxembourg: who’s the winning suitor? 

When choosing between Ireland and Luxembourg for ETF domiciliation, the decision isn’t as straightforward as it might seem. While Ireland is often seen as the go-to destination, Luxembourg stands as an equally strong suitor in the ETF space.  

In fact, Luxembourg is home to over 400 ETFs and boasts a robust infrastructure, with asset service providers often using the same platforms to service Luxembourg-domiciled ETFs as those domiciled in Ireland. 

While Ireland’s tax advantages remain a key differentiator, Luxembourg offers similar benefits and service quality for asset managers looking to launch ETFs. However, Luxembourg provides unique advantages in certain areas—such as strong expertise on active funds and the well-established ETF share class model. These factors will certainly contribute to making Luxembourg a very viable option for ETF launches, especially those focused on increasingly complex and actively managed strategies. 

The next steps for Luxembourg in the ETF space 

Luxembourg is taking meaningful steps to compete in the ETF space, and momentum is building, but there’s still work to do—particularly when it comes to speed and visibility. As American author Guy Kawasaki wisely said, “Visibility creates opportunities.” Luxembourg would stand to gain immensely by continuing to actively promote itself as a leading choice for asset managers. 

While traditional mutual funds will continue to be in demand, actively managed ETFs are growing rapidly. Although the future remains uncertain, both Luxembourg and Ireland are well-positioned to support both active ETFs and mutual funds. The question now is whether Luxembourg can capitalise on the momentum and accelerate its efforts to be a truly competitive player in the ETF market. 

As Luxembourg continues to evolve as a hub for ETFs, we see that asset managers and service providers considering entering the ETF market often need guidance and support to navigate the associated operational complexities. 

At PwC Luxembourg, we have developed deep expertise in supporting asset managers to launch ETFs, including ETF share classes, as well as assisting service providers in building ETF servicing capabilities. Our support spans the entire journey, from strategic considerations, feasibility assessments, and business case design, to impact or gap analyses, operating model design, and facilitating ETF launches (filing, listing, among others), as well as ongoing maintenance (for instance, reporting).  

For a more detailed overview, feel free to explore our webpage. Our team of specialists is always eager to discuss market insights, emerging trends, and their implications. So, don’t hesitate to reach out to them to exchange ideas. 

*Since this agreement is between Ireland and the US, two sovereign nations, Luxembourg can’t match it unless the US revisits its tax policies, which seems unlikely.

What we think

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