There is no lack of investment opportunities in today’s financial sector, but every investor’s situation is different, and many welcome new options. If you’re seeking alternatives beyond mutual funds and stocks, you might consider UCITS funds. UCITS stands for the Undertakings for the Collective Investment in Transferable Securities, which is a regulatory framework that governs the sale and management of mutual funds in the European Union. UCITS funds are enormously popular in Europe, but investors outside the EU can access them as well. Here’s what you need to know about how these funds work.
A financial advisor can help you create a financial plan for your needs and goals.
What Are UCITS Funds?
First of all, UCITS isn’t the name of any single fund. It’s an expansive term for a category of mutual funds that are compliant with EU regulatory standards for marketing and sale to individual and retail investors. The term dates to 1985 and was a precursor of sorts to the 1993 founding of the EU. European nations embraced UCITS guidelines to streamline the investment process. Having a single framework within which to oversee continental mutual funds bypassed the need for regulatory approval from each country.
According to the European Commission, UCITS funds currently account for approximately 75% of all collective fund investments by European small investors. These funds can invest in various securities, including stocks, bonds, cash and short term treasury instruments. For a fund to be considered UCITS-compliant, it must:
- Invest exclusively in listed securities.
- Be an open fund that allows investors to enter or leave the fund at will.
- Diversify underlying investments across different securities to reduce risk.
These funds offer protection for investors against market risk while allowing them to maintain liquidity in their investments. UCITS funds can be traditional mutual funds, exchange-traded funds (ETFs) or money market funds. According to the European Fund and Asset Management Association, total assets under management in UCITS funds reached $10.14 trillion through the second quarter of 2019, with 33,720 funds for investors to choose from.
How UCITS Funds Compare to Domestic Mutual Funds
U.S.-based mutual funds and UCITS funds have important similarities. Each category uses pooled assets from multiple investors to purchase stocks, bonds or other securities. They can be bought and sold by individual investors and can include a blend of stocks, bonds and other assets. And both charge an expense ratio, which represents a percentage of the fund’s assets and appears as a yearly management fee.
The key differences come down to regulation and how the funds bought and sold. The Securities and Exchange Commission (SEC) regulates U.S.-based mutual funds, which must adhere to guidelines established by the Investment Company Act of 1940. The commission and law outline exactly how funds may interact with investors. The EU oversees UCTIS regulations, and naturally there are some unique features to European governance.
For instance, UCTIS funds must adhere to the 5/10/40 rule, which prohibits funds from concentrating more than 5% of their assets in a single issuer. The concentration can increase to 10% as long as the total value of those assets doesn’t account for more than 40% of the fund’s net assets. Short-selling of UCITS funds can only occur through derivatives, and funds may not invest in directives or commodities directly. A fund also can borrow only up to 10% of its net assets for short-term liquidity purposes.
Who Can Invest in UCITS Funds?
While European investors still trade the majority of shares under UCITS, individual and institutional investors in other countries can get in the game too. But for U.S. investors, buying into UCITS funds is a little different than buying traditional mutual funds.
You can purchase UCITS funds through a U.S.-based fund manager. That said, only an authorized EU-based management company can oversee that fund. So a U.S. fund manager either must set up such a company or partner with one. It’s not a roadblock, but it is an extra step.
Are There Regulations to Meet Before Investing in UCITS Funds?
There are many regulations, and they run two ways. UCITS funds must register with the SEC before U.S. investors can buy in. Specifically, that means the funds register under the Securities Act and the Investment Company Act. A work-around for this requirement exists in the form of a private placement offering. Fund managers can offer these funds to U.S. investors through a private placement if that offering follows federal Regulation D guidelines or private offering rules established by the Securities Act.
Ultimately, you can’t just buy and sell shares of a UCITS fund like you would a US-based fund. You have to purchase them through a fund manager who meets guidelines at the federal, state and EU levels. You can set up an offshore investment account through a brokerage that has UCITS offerings, but often this is costly and regulatory guidelines still apply.
Considering all the regulatory requirements, everyday investors may find UCITS funds hard to access. Also, there’s an additional tax factor to weigh. The tax structure of UCITS funds often puts them in category of passive foreign investment companies. This can potentially result in less favorable tax treatment of gains from these investments, especially when compared to U.S.-based mutual funds or exchange-traded funds.
Structurally, UCITS are similar to the conventional mutual funds in many ways. However, there are important differences affecting how you can invest in them and how they impact your tax liability. If you want to diversify your portfolio with global investments, U.S.-based funds and ETFs that invest in international and emerging markets may be a better choice.
Tips for Investing
- When considering new investments, keep your overall financial plan in mind. Also factor in the potential tax implications when deciding where to hold assets. Some funds, such as ETFs, may complement a taxable brokerage account, since they’re already tax-efficient. Alternately, a traditional mutual fund may be a better fit for a tax-advantaged investment account, such as a 401(k) or traditional IRA.
- Consider talking to a financial advisor about how you can diversify to include assets that go beyond the U.S. market. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
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