Regulatory framework: ’40 Act versus UCITS today
US-domiciled ETFs are primarily regulated under the Investment Company Act of 1940 (’40 Act), alongside rules set by the US Securities and Exchange Commission (SEC) rules. Most ETFs operate under Rule 6c-11m supplemented where needed by additional exemptive relief, particularly for evolving structures such as ETF share classes within mutual funds. This framework adapts core mutual fund principles, including diversification, liquidity, custody, and independent board oversight, to accommodate ETF-specific features such as in-kind primary market activity and intraday exchange trading.
In Europe, the vast majority of ETFs are established as UCITS ETFs. These are UCITS funds that meet the European Securities and Markets Authority (ESMA)5 definition of an ETF and comply with the UCITS Directive, ESMA Guidelines on ETFs and other UCITS issues,6 as well as national regulations and supervisory guidance (for example, from the Central Bank of Ireland and the CSSF in Luxembourg).
The UCITS framework provides a single marketing passport across the European Economic Area (EEA), supported by a prescriptive regime covering eligible assets, leverage, and risk diversification. It also requires the mandatory appointment of an independent depositary with strict safekeeping and oversight responsibilities, reinforcing investor protection and operational discipline.
From UCITS KIID to PRIIPs KID: The new disclosure baseline
One of the most important recent developments for US ETF sponsors entering the European market is the full transition of UCITS funds—including UCITS ETFs—to PRIIPs Key Information Documents (KIDs) for retail distribution. The temporary exemption that previously allowed UCITS to rely on UCITS KIDs instead of PRIIPs KIDs expired at the end of 2022. As of 1 January 2023, any UCITS marketed to retail investors in the EEA must produce a PRIIPs KID.
In practice, this change requires any new UCITS ETF platform targeting retail investors to embed PRIIPs KID production, governance and performance scenario methodologies into its operating model from the outset. For US ETF sponsors less familiar with these requirements, partnering with an experienced service provider can be a practical way to accelerate readiness and ensure ongoing compliance.
Investment universe and portfolio construction
In the US, ETFs organized as ’40 Act funds are structured to qualify as regulated investment companies (RICs) for tax purposes. While they must meet diversification, leverage and liquidity requirements, they offer considerable flexibility in strategy design, fund objectives and use of derivatives, subject to SEC rules, including derivatives risk management program requirements.
By contrast, UCITS ETFs operate within a more prescriptive regulatory framework. UCITS eligible asset rules and diversification limits—such as the 5/10/40 risk spreading rule—set clear boundaries on portfolio construction. The use of derivatives, counterparty exposure and collateral management is also tightly regulated. In addition, ESMA’s Guidelines on ETFs introduce further requirements, particularly for index-tracking and synthetic UCITS, including enhanced disclosure on tracking error and counterparty risk where instruments such as total return swaps are used. For US sponsors, this can require adapting certain strategies, especially those involved complex or highly leveraged exposures to ensure alignment with UCITS parameters.
In its February 2026 FAQ on crypto-assets,7 the CSSF clarified that Luxembourg UCITS may gain indirect exposure to crypto-assets, up to a maximum of 10% of their net asset value (NAV). Such indirect investments in financial instruments with crypto-assets as an underlying asset are limited to transferable securities that do not embed any derivatives.
Creation/redemption and primary market mechanics
Both US ETFs and UCITS ETFs rely on authorized participants (APs) to create and redeem shares in large blocks, typically through in-kind or cash baskets that help keep secondary market prices aligned with NAV. US ETFs historically emphasize in-kind creation and redemption, including the use of custom baskets, which enhances tax efficiency by enabling the transfer of low-cost-basis securities out of the fund without triggering realizing gains at the fund level.
UCITS ETFs also use in-kind baskets where feasible, but cash creations and redemptions remain important, especially for certain asset classes or local market constraints, and are subject to ESMA’s disclosure and collateral requirements when derivatives and securities lending are used. From an operating model perspective, US sponsors must design European primary market arrangements that reflect local market practices (for example, settlement infrastructures, CSD links and local AP preferences).
Secondary market trading and distribution realities
In the US, ETFs benefit from a large, integrated domestic market supported by Regulation National Market System (Reg NMS8), offering deep on-exchange liquidity and a broad base of retail and institutional users. By contrast, UCITS ETFs in Europe are listed across multiple exchanges and trading venues under MiFID II (Markets in Financial Instruments Directive II)9. This results in a more fragmented liquidity landscape, combining with differing local settlement conventions that can influence spreads and overall trading costs for end investors.
For US sponsors, entering the European market presents a twofold challenge. The first is selecting the most appropriate primary listing venue—or combination of venues—to optimise visibility and liquidity. The second is building a robust cross-border distribution strategy that reflects the diversity of local platform architectures, advisory models and language requirements.
The pan-European UCITS passport allows the same ETF to be registered and sold across many markets, but effective distribution still requires local expertise and infrastructure.
Taxation: Positioning for non-US investors
Tax remains a primary driver of domicile choice for non-US investors comparing US ETFs with UCITS ETFs. US-domiciled ETFs structured as RICs, are generally tax efficient for US taxpayers. However, non-US investors are often subject to US withholding tax on dividends—typically 30% in the absent of a treaty—and may face US estate tax exposure on US-situs assets above relatively low thresholds. Treaty relief varies by country of domicile of the investors, and only certain treaties materially reduce the estate tax exposure.
UCITS ETFs domiciled in Ireland or Luxembourg are designed to benefit from local tax regimes that are often exempt at fund level, as well as from treaty networks. These can reduce withholding tax on US and other foreign-source dividends (for example, to around 15% on US portfolio dividends for certain Irish‑domiciled funds under the US–Ireland tax treaty.)
In addition, in many jurisdictions, investors in UCITS ETFs are generally not subject to US estate tax, as their holdings represent shares in an offshore fund rather than US-situs securities. For US sponsors targeting international investors, establishing a UCITS ETF platform can therefore result in materially improved after-tax outcomes compared with distributing US-domiciled ETFs in those markets.
Custody, depositary and oversight
The US model requires ETFs to appoint qualified custodians under the Investment Advisors Act of 1940, with segregation and oversight duties supervised by the independent mutual fund board and the Securities and Exchange Commission (SEC). UCITS, by contrast, impose a mandatory depositary regime: each UCITS ETF must appoint a single depositary responsible for safekeeping assets, monitoring cash flows and oversight of key operation processes, including subscriptions and redemptions, valuation, and compliance with investment limits.
For US ETF sponsors entering the UCITS market, understanding the European operational model and oversight dynamics is essential to building an efficient and compliant platform, particularly in core domiciles such as Luxembourg and Ireland. At the centre of this structure is the management company (ManCo), which is responsible for the fund's overall operation and regulatory compliance. While broadly comparable in role to US fund governance frameworks, the ManCo operates within a delegated model: it may outsource core functions—such as fund administration, portfolio management and distribution—to specialized providers, while retaining full responsibility for oversight.
The Depositary sits independently above the ManCo in the oversight architecture. Beyond safekeeping the fund's assets and monitoring cash flows, it performs an explicit supervisory role over the ManCo, including verification of NAV calculation and ensuring that fund operations comply with applicable law and the fund's constitutional documents.
In practice, the UCITS operating model is built around a clear three-party framework comprising the management company, the fund administrator and the depositary (including custody). The ManCo directs the fund and oversees its delegates; the fund administrator is responsible for NAV calculation, accounting and reporting; and the depositary ensures asset protection while providing independent oversight of the overall structure.
The fastest and most efficient approach to establish a presence in the EU and set up a local UCITS is to team up with dedicated and experienced third-party service providers for the depositary, fund administrator and management company function who can provide the necessary knowledge, expertise and substance.
ETF share classes: US, Ireland and Luxembourg
Both the US and the main UCITS domiciles have evolved to allow ETF share classes alongside traditional mutual fund share classes, but through different mechanisms.
In the US, the long-standing patent covering ETF share class structure within mutual funds has expired, and following a September 2025 notice of intent, the SEC granted Dimensional Fund Advisors exemptive relief in November 2025 to offer ETF share classes on certain mutual funds. Similar structures remain outside the scope of Rule 6c-11 and require specific exemptive orders with the SEC notice providing that an order will be issued unless a hearing is ordered. As of April 2026, over 80 asset managers have filed for ETF share class exemptive relief.
In Europe, UCITS frameworks in Ireland and Luxembourg already allow for multiple share classes within a single sub-fund, and regulators have permitted ETF share classes under ESMA’s ETF naming and disclosure rules. In Ireland, the Central Bank of Ireland historically required the ESMA’s required the “UCITS ETF” designation at fund or sub-fund level where an ETF share class is present, which may have dampened adoption, despite ETF share classes being permitted since 2017. In a recent policy shift announced by the Central Bank, managers may include the ‘UCITS ETF’ identifier either at sub‑fund or share class level.
Luxembourg takes a more flexible approach. The Commission de Surveillance du Secteur Financier (CSSF) requires “UCITS ETF” designation only at share class level where relevant, allowing umbrella and sub-fund names to remain unchanged when not all share classes are listed.
For US sponsors, this creates a range of strategic options: from launching standalone UCITS ETF platforms to implementing hybrid structures that combine listed ETF share classes with unlisted institutional or retail share classes within the same sub-fund.
ESMA's opinion on UCITS share classes reinforces this flexibility through the non-contagion principle, which requires that features or costs specific to one share class do not adversely affect others. Although the board is responsible for ensuring that an appropriate non-contagion framework is in place at fund level, neither ESMA nor the local regulators impose a prescriptive reporting requirement demonstrate compliance.
Governance requirements and investor information
US ETFs operate under a governance framework centred on board-level oversight in line with the ’40 Act. Independent directors are responsible for supervising key areas such valuation, compliance, service providers and conflicts of interest.
UCITS ETFs are subject to fund and management company boards, plus the depositary’s oversight duties, and must comply with detailed prospectus disclosures and requirements, PRIIPs KID, financial reporting, and website disclosure requirements.
PRIIPs KIDs introduce forward-looking performance scenarios and enhanced cost disclosures for UCITS ETFs, replacing the historical performance based UCITS KIIDs, which changes how European retail investors perceive risk and reward compared with traditional US ETF fact sheets and prospectuses. US sponsors entering Europe need to align their global marketing narrative with these more prescriptive European retail disclosure standards while maintaining consistency with their US positioning.
Strategic considerations for US ETF sponsors
For US ETF sponsors, launching a UCITS ETF range in Ireland or Luxembourg is no longer simply a regulatory exercise; it is a strategic decision with multidimensional implications. Key drivers include access to non-US investors who cannot—or choose not to—or will not invest directly in US-domiciled funds, the ability to deliver more treaty-efficient exposure and avoid US estate tax for many investors; and the possibility of building hybrid UCITS platforms with both listed and unlisted share classes tailored to local distribution channels.
At the same time, sponsors must navigate PRIIPs KID obligations, UCITS-specific investment and collateral constraints, depositary oversight and European market microstructure. For many large US players, the optimal end-state is a dual-platform model: US-domiciled ETFs tailored to the domestic market, and UCITS ETFs – often in Ireland and Luxembourg – aimed at European, Middle Eastern, Asian and Latin American investors, with aligned investment processes but carefully differentiated structures and disclosures.
Setting up in Europe requires local knowhow and substance in managing risks, complying with the regulatory framework, ensuring delegation oversight and dealing with the European capital markets infrastructure.
Opportunity to accelerate your ETF journey
In both the US and Europe, specialist “ETF‑in‑a‑box” platforms allow first‑time issuers to launch products relatively quickly by plugging into established infrastructure and capabilities. They typically cover the key elements needed for an ETF—from regulatory and governance set‑up to fund operations and capital markets support—so managers do not have to build these capabilities from scratch. Most solutions are modular, enabling issuers to fully outsource or selectively bolt on functions in line with their existing operating model.
