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.

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.

Learn more about how to trade or invest in ETFs

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

Trading 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.

While these measures are aimed at protecting traders, always bear in mind that all trading 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 traders 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 trading indices where calculation methodology isn’t easily accessible and free of charge

Learn more about risk and reward in trading

UCITS ETF 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

When trading ETFs online with us, you’ll use a derivative to speculate on the price movements of the underlying asset without owning the asset itself. This is because derivatives like CFDs track the price of the asset on which they are based.

To invest in UCITS ETFs, follow these steps:

1. Create an account with us or log in
2. Search for the UCITS ETF you want to trade
3. Open and monitor your position

When you trade ETFs with CFDs, you can use leverage to get amplified exposure to the ETF of your choice. This means that you can open a position for just a fraction of the cost of traditional investing, where you’d have to pay the full value of the shares upfront.³

But, please note, while leverage can magnify your profits, it can also magnify your losses, so it is important to create a risk management strategy before you trade.

Learn how to take a position on ETFs or start trading now.

What does UCITS mean and what are UCITS ETFs 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
• You can trade UCITS ETFs with us by opening a CFD trading account

Footnotes:

¹ US Securities and Exchange Commission, 2011
² iosco.org, 2003
³ Traders stand to lose more than their deposit margin and their loss will exceed their initial deposit when they use leverage. Therefore, it’s important to take steps to manage your risk.