What does ‘UCITS’ mean and what are UCITS ETFs?

What does UCITS mean?

UCITS stands for ‘undertakings for collective investment in transferable securities’. The UCITS legislation governs the marketing and distribution of a wide range of collective investment schemes.

It’s an EU directive that provides a regulatory framework for funds that are managed and based in the EU. The directive was created to ensure that investors are protected from fraudulent activities and misleading information by market participants and contain two key principles:

• The principle of best execution, which stipulates that brokers get their customers the best execution available for their orders¹
• The principle of investor protection, which says investors should be protected from misleading, manipulative or fraudulent practices²

A UCITS-compliant fund can be marketed to ordinary investors because it adheres to common risk and fund management standards, designed to shield investors from unsuitable investments.

UCITS funds account for 75% of all collective investments by small investors in Europe. While UCITS is an EU regulation, the UK government took steps to ensure the framework would continue in the UK post-Brexit.

What is a UCITS ETF?

A UCITS ETF is an exchange traded fund that follows a system of safety measures in accordance with UCITS regulations. This means that its holdings must be diversified, with no single holding above 10% of the fund’s net asset value (NAV).

It must be liquid, allowing investors the flexibility to sell their shares at any time. Further, UCITS ETFs must be held separately from those of the fund provider and supervised by an independent custodian, to safeguard investors’ assets if the provider runs into financial trouble.

Examples of UCITS-compliant ETFs

• Vanguard FTSE 100 UCITS ETF tracks the performance of the FTSE 100, which is made up of the 100 largest firms in the UK
• iShares Core S&P 500 UCITS ETF - EUR represents 500 of the largest US companies
• SPDR FTSE UK All Share UCITS ETF offers exposure to over 600 shares listed on the London Stock Exchange
• iShares Dow Jones Industrial Average UCITS ETF tracks the performance of 30 large US companies, covering a wide range of industries
• iShares Core MSCI World UCITS ETF gives exposure to companies from developed countries

The advantages of UCITS ETFs

Investing in UCITS ETFs is often a popular choice due to the advantages that these funds offer. For one, investors enjoy added risk protection due to stringent rules on fund management, diversification, service provider administration and protection of assets.³

While these measures are aimed at protecting traders and investors, always bear in mind that all trading and investing incurs risk and you may get back less than what you put in. To help individuals safeguard their capital , UCITS-compliant funds have to provide:

• A simplified prospectus: given to investors before they open a position. It helps give them a clear understanding of the UCITS ETF they intend to get exposure to, as well as the costs and risks involved
• The KIID (key investor information document): a pre-contractual document with essential information about a fund, which helps investors make informed decisions about its risks
• Risk management in UCITS ETFs: a set of regulations which stipulate that funds should be diversified, with no single holding exceeding 10% of the fund’s total NAV. For ETFs using derivatives, exposure should be covered with collateral valued at 90% of NAV and meet minimum risk management standards. UCITS funds cannot use leverage other than on a temporary basis and up to a maximum of 10% of their NAV. Direct short selling is not permitted
• Liquidity: ensures that all investments remain open-ended, meaning investments can be redeemed any time an investor wishes to do so
• Transparent and regular reports: prohibits funds from investing in indices where calculation methodology isn’t easily accessible and free of charge

UCITS EFT ratings

UCITS ratings offer a simplified summary of a UCITS ETF’s historical performance over a three-, five- and ten-year period, compared to other similar funds. There are two main ratings agencies; S&P and Morningstar, while MSCI provides sustainability ratings.

Standard & Poor’s (S&P) UCITS ratings

S&P has ratings on over 500 funds, including UCITS ETFs. It assigns credit quality and fund volatility ratings. These take into consideration each fund’s management track record and credibility, as well as its operating policies ad commitment to such policies, its risk preference and on the effectiveness of management’s internal risk measures.

Morningstar UCITS ratings

Morningstar gives UCITS ETFs from one to five stars based on their performance compared to similar funds. Mathematical evaluations of past performance, which take into consideration three- five- and ten-year ratings, are used to give an overall score.

MSCI sustainability ratings

MSCI sustainability ratings measure the ESG characteristics of funds and ETFs in order to give investors a better understanding of the risks involved. ETFs are given a rating from CCC (lowest) to AAA (highest). These are based on the weighted average score of an ETF’s holdings and its exposure to assets with the worst-rated ESG holdings.

Learn more about ratings agencies and how they work

How to trade UCITS ETFs and funds

Retail traders can take a position on non-UCITS ETFs through CFDs to speculate on rising and falling prices. When trading, you’ll never take actual ownership of the underlying assets – a strategy best suited to short-term horizons.

And since you never actually own the underlying asset, you pay zero commission as the cost of opening your position is covered in the spread.

UCITS summed-up

• UCITS stands for ‘undertakings for collective investment in transferable securities’. Its legislation governs the marketing and distribution of a wide range of collective investment schemes.
• UCITS ETFs follow a system of safety measures in accordance with UCITS regulations
• UCITS-compliant ETFs can be marketed to retail traders and investors as they conform to common risk and fund management standards
• With us, you can trade in UCITS ETFs using a CFD trading account

Footnotes:

¹ US Securities and Exchange Commission, 2011
² iosco.org, 2003
³ carnegroup.com, 2019