Considerations for non-US investors: US-domiciled ETFs vs. Irish-domiciled UCITS ETFs
Key takeaway
ETFs can provide investors and their advisors with low-cost, efficient access to a broad range of investment exposures. But non-US investors have several product options to consider, including US-domiciled ETFs or Irish-domiciled UCITS ETFs. Understanding the structural differences between the two is crucial to ensure the right fit for targeting individual portfolio objectives.
Exchange traded funds (ETFs) continue to gain momentum as investors seek efficient, transparent, and accessible investment solutions. There are several product options to choose from including:
- US-domiciled ETFs which are regulated by the Securities and Exchange Commission (SEC) and operate as regulated investment companies (RICs) under the framework of the Investment Company Act of 1940, as amended (1940 Act)
- Europe’s Undertakings in Collective Investments and Transferable Securities (UCITS) ETFs, which operate pursuant to the EU’s UCITS Directive across EU countries, offer wide availability across EU member countries via passporting, as well as Asia-Pacific, Middle East, and Latin America regions. UCITS generally have two main domiciles: Luxembourg and Ireland, and Irish-domiciled UCITS ETFs account for more than three quarters of European ETFs.1
While US-domiciled ETFs and UCITS ETFs can hold comparable underlying securities and often track similar benchmarks, they operate under distinctly different regulatory and taxation frameworks that can impact an investor’s net return results. There is no single right answer. Rather, investors must assess their individual investing objectives, liquidity requirements, and tax scenarios to find the optimal solution to meet their individual needs.
Snapshot: Key features of US ETFS and UCITS
It is important for investors to carefully consider the distinct features of each of the ETF regimes and how they can potentially impact investment outcomes and tax liabilities. For example, differing concentration limits set by regulation can cause some variation in performance results, particularly when the indexed exposure is highly concentrated in a small number of constituents. But more importantly, currency exposure can, in certain market conditions, result in potentially significant differences in after-tax return outcomes. Some of the key features of the two structures are summarized in Figure 1:
Figure 1: Comparing US-domiciled ETFs vs Irish-domiciled UCITS ETFs
| Feature | US-Domiciled ETF | Irish-domiciled UCITS ETF |
| Regulatory authority | US Securities and Exchange Commission (SEC) | European Securities and Markets Authority (ESMA) |
| Primary regulatory framework | Investment Company Act of 1940, as amended | EU UCITS Directive |
| Primary listing | NYSE, NASDAQ, Cboe | London Stock Exchange (LSE), Euronext (Paris, Amsterdam, Milan), Xetra (Germany), SIX Swiss Exchange, etc. |
| Primary trading hours | US market hours | European market hours |
| Investor access | Global, but mainly targeted at US investors | Globally accessible, and passportable within the EU, APAC, Middle East, and Latin America |
| Product scope | Extensive product range, supported by a large and flexible regulatory framework | More focused product range, primarily covering broad indices and standard themes such as equities and bonds |
| Currency hedging options | Limited, but some availability by select ETF sponsors | Widely available with multiple currency share classes |
| On‑screen liquidity & bid‑ask spreads | Generally, deeper on‑screen liquidity and tighter bid‑ask spreads based on centralized trading and higher visible volumes | On‑screen liquidity may appear lower and bid‑ask spreads wider due to fragmented trading across European venues and limited visibility into off‑screen market‑maker liquidity, despite underlying execution capacity often remaining strong |
| Distribution policy | Generally, do not offer accumulating share features; dividends are typically distributed | Can either distribute or reinvest income, offering both distributing and accumulating share classes |
| Withholding tax (WHT): Investment level (distributions received from investments held) | 0% on US equities* Dividends paid gross to the fund | Typically, 15% on US equity dividends held via Irish‑domiciled UCITS** |
| Withholding tax: Investor level (distributions received from the fund) | Often subject to a 30% withholding tax, which may be reduced under applicable tax treaties | In general, most non-Irish investors will be able to provide an Irish non-residency certificate that provides for exemption from WHT at the investor level. |
| Capital gains tax | Neither US-domiciled nor UCITS ETFs generally subject non-US investors to US capital gains tax. Capital gains taxation is determined by the investor’s home country tax laws. | |
* For investments in securities domiciled outside the US, there is often a WHT imposed at the statutory rate, subject to reduced domestic law or treaty rates where applicable. **Irish-domiciled UCITS ETFs typically benefit from the US–Ireland tax treaty and incur a 15% WHT on US dividends at the fund level. For investments in securities domiciled in countries outside of Ireland, there is often a WHT imposed at the statutory rate, subject to reduced domestic law or treaty rates where applicable.
US-domiciled ETFs vs. UCITS ETFs: A deeper dive into the differences
US ETFs are globally traded but can be restricted for certain retail segments (notably, EU/UK retail). They do, however, offer a broad product set globally, including many niche sector, factor, and thematic exposures with a daily liquidity profile that includes both active and passive index ETFs as well as leveraged and inverse products.
US-domiciled ETFs are primarily listed on US exchanges including, NYSE Arca, NASDAQ, or Cboe, and trade during US market hours, although many also trade in pre- and post‑market sessions. While some US-domiciled ETFs offer currency hedged variants, share class and currency choice is typically narrower than UCITS with most US ETFs trading in US dollars.
UCITS represent a retail European regulatory framework that sets harmonized standards across borders for investment funds. While UCITS offer strong coverage in core beta and mainstream factors and themes, strategies involving higher leveraged products or more complex derivatives are more limited under the UCITS framework due to stringent risk and leverage constraints. UCITS ETFs commonly offer multiple share classes (USD/EUR/GBP) and may offer both hedged and unhedged classes. It is important for investors to distinguish ‘trading currency’ from currency exposure of the underlying assets. Trading currency refers to the currency in which an ETF is transacted.
Beyond the surface: Liquidity, diversification, and taxation differences
Liquidity can vary across the two structures with US-domiciled ETFs often exhibiting higher on‑screen volumes and deeper displayed liquidity, which can support tighter bid-ask spreads—especially in large, core ETFs. In contrast, on-screen liquidity for UCITS ETFs can vary materially by listing venue and share class.
However, ETF liquidity is fundamentally linked to the liquidity of the underlying index constituents and the operation of the primary market creation and redemption mechanism, rather than on‑screen trading activity alone. To the extent the different ETF structures track the same index, the capacity for market participants to access underlying constituent liquidity may be similar, subject to market conditions, trading structure, and execution approach. Investors typically access this underlying liquidity by transacting with ETF liquidity providers, such as authorized participants and other market makers.
While liquidity considerations shape execution quality, investors should also evaluate total trading costs and cost of ownership. Total trading costs include bid‑ask spreads, market impact (change in the price of a financial instrument caused by the execution of a trade), and trading commissions. Total cost of ownership extends beyond execution and incorporates both trading costs and the fund’s total expense ratio.
Asset diversification rules differ between US‑domiciled and UCITS ETFs and are most evident in index‑tracking strategies dominated by a few mega-cap names. While US‑domiciled funds must comply with IRS diversification regulations for RICs in order to retain pass-through treatment for income and gains—UCITS index‑tracking funds are given greater flexibility due to specific regulatory exemptions that allow higher single‑issuer weights and no aggregate concentration limits. As a result, UCITS index-tracking funds may exhibit greater top‑holding concentration.
- To maintain its RIC status, the RIC must pass a quarterly IRS diversification test: (1) no one issuer can represent more than 25% of the fund’s total assets; and (2) positions exceeding 5% cannot in aggregate exceed 50% of the fund’s total assets.
- UCITS diversification rule is commonly summarized by the “5/10/40” rule: a UCITS fund may invest up to 5% in a single issuer, which can be increased to 10%, provided that the aggregate exposure to issuers above 5% does not exceed 40% of total assets. However, for index‑tracking UCITS seeking to replicate an index where certain constituents are highly dominant, an exception applies: the fund may invest up to 35% in a single issuer, while exposure to any other individual issuer is capped at 20%.
Taxation is a potentially impactful topic with significant ramifications for non-US investors. Consideration should be given to each element of the taxation structure including how income is taxed, along with withholding tax and capital gains realizations.
- Withholding tax for non‑US investors holding US-domiciled ETFs, dividends distributed from the fund are generally subject to a 30% withholding tax, unless reduced under an applicable tax treaty. For Irish-domiciled UCITS ETFs, withholding tax is applied at the investment level and varies by the domicile of securities held by the fund. Irish‑domiciled UCITS ETFs commonly incur a 15% US withholding tax on dividends received from US assets under the US–Ireland treaty. Distributions from Irish-domiciled UCITS ETFs are generally not subject to withholding tax for non-resident investors and any applicable taxes are based on the investor’s country of residence.
- Capital gains tax for non-US investors holding UCITS ETFs generally do not apply, as these are non‑US‑domiciled assets, and any capital gains taxation is determined by the investor’s home‑country tax regime. US tax law generally exempts non‑resident aliens from capital gains tax on the sale of publicly traded securities, provided the investor is not present in the US for an extended period and the gains are not effectively connected with a US trade or business.
- Income distributions of US-domiciled ETFs are generally distributed to investors; accumulating share classes are uncommon. The US ETF RIC structure mandates that ETF sponsors distribute at least 90% of investment company taxable income to maintain pass‑through tax treatment. In contrast, UCITS ETFs often offer both distributing and accumulating share classes. Accumulating share classes reinvest income in the fund, which can support compounding; but, similar to distributing share classes, income distributions remain subject to a 15% WHT on dividends received from US assets.
Making the choice: Aligning structure with investor needs
For non‑US investors seeking exposure to US markets, both US‑domiciled and UCITS ETFs can provide efficient access to comparable underlying markets, but structural differences matter at the margin. Variations in tax treatment, diversification rules, trading characteristics, and currency options can all influence investment outcomes.
As a result, the optimal structure depends on an investor’s individual requirements regarding currency exposure and secondary market liquidity, tax profile, and regulatory constraints. Careful assessment of these factors is essential to selecting the most appropriate ETF vehicle.