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
- 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.
Footnotes:
1 US Securities and Exchange Commission, 2011
2 iosco.org, 2003
3 carnegroup.com, 2019
As an expert in financial regulations and investment products, I can confidently provide in-depth knowledge on the concepts covered in the article about UCITS and UCITS ETFs. My expertise is grounded in a comprehensive understanding of financial markets, regulatory frameworks, and investment instruments.
UCITS (Undertakings for Collective Investment in Transferable Securities): UCITS is an EU directive governing the marketing and distribution of collective investment schemes. It establishes a regulatory framework for funds managed and based in the EU. The primary goal is to protect investors from fraudulent activities and misleading information by market participants. Two key principles underpin UCITS: the principle of best execution, ensuring brokers obtain the best execution for customer orders, and the principle of investor protection, safeguarding investors from misleading, manipulative, or fraudulent practices.
UCITS-compliant funds adhere to common risk and fund management standards, allowing them to be marketed to ordinary investors. These funds account for a significant portion of collective investments by small investors in Europe, emphasizing their popularity and widespread use.
The UK government, even post-Brexit, has taken measures to ensure the continuity of the UCITS framework in the country.
UCITS ETF (Exchange Traded Fund): A UCITS ETF is an exchange-traded fund that follows safety measures outlined in UCITS regulations. These measures include diversification of holdings, with no single holding exceeding 10% of the fund's net asset value (NAV). Additionally, UCITS ETFs must be liquid, allowing investors to sell shares at any time. They must be held separately from the fund provider's assets and supervised by an independent custodian to safeguard investors' assets if the provider faces financial trouble.
Examples of UCITS-compliant ETFs:
- Vanguard FTSE 100 UCITS ETF
- SPDR FTSE UK All Share UCITS ETF
- iShares Dow Jones Industrial Average UCITS ETF
- iShares Core MSCI World UCITS ETF
Advantages of UCITS ETFs: Investing in UCITS ETFs offers added risk protection due to stringent rules on fund management, diversification, service provider administration, and asset protection. To safeguard capital, UCITS-compliant funds provide a simplified prospectus, a key investor information document (KIID), risk management regulations, liquidity, and transparent and regular reports.
UCITS ETF Ratings: UCITS ratings provide a summary of a UCITS ETF's historical performance over three-, five-, and ten-year periods compared to similar funds. Ratings agencies such as Standard & Poor's (S&P), Morningstar, and MSCI assess factors like credit quality, fund volatility, and sustainability to provide ratings ranging from one to five stars or from CCC to AAA.
How to Trade UCITS ETFs and Funds: Retail traders can take positions on non-UCITS ETFs through CFDs (Contracts for Difference) to speculate on price movements. This strategy is suitable for short-term horizons, and since traders do not own the underlying asset, they pay zero commission as the cost is covered in the spread.
In conclusion, UCITS and UCITS ETFs play a crucial role in providing investors with regulated and diversified investment opportunities, and their popularity is attributed to the protective measures embedded in their framework.
