European Investors Are Now Blocked From Investing in One of the Most Popular ETFs

There are a bunch of ways to bet on the U.S. stock market. But if you’re an investor in Europe, you’re now missing out on one of the biggest, most popular ones – the SPY.

The world’s largest exchange-traded fund – the $270 billion SPDR S&P 500 ETF Trust, which is listed on NYSE Arca under the ticker SPY – is no longer available to buy for retail investors in the continent. That’s because European Union rules that came into force this year require fund issuers to provide a Key Information Document, and SPY doesn’t have one. Current holders can keep it or sell it; it’s just buying that’s verboten.

The “short and consumer-friendly” KID now necessary to get European money is aimed at giving an overview of the product with its risks and costs in a format compliant with the Packaged Retail and Insurance-based Investment Products regulation. PRIIP rules are designed to encourage more efficient markets in the EU in addition to the Markets in Financial Instruments Directive II that took effect in January.

This means that just like SPY, the $60 billion PowerShares QQQ Trust Series 1 ETF tracking the Nasdaq 100 Index (ticker QQQ), the $43 billion iShares MSCI Emerging Markets ETF (EEM) and any other fund that doesn’t provide a KID are off-limits for purchase in Europe. Hargreaves Lansdown Plc, one of the region’s biggest platforms for retail investors, pulled about 1,200 ETFs from sale on its website in January.

That might be good news for the European ETF market, which so far has struggled to gain traction. January was certainly stellar, with assets invested in the region’s exchange-traded products jumping by more than $50 billion – a record – to around $855 billion, according to data compiled by Bloomberg and consultancy ETFGI LLP. That still pales next to the $3.6 trillion in the U.S. at the end of last month.

“This could actually be a blessing in disguise,” said Bloomberg Intelligence analyst Eric Balchunas. “There is too much reliance on the U.S. ETF market. There are plenty of very usable alternatives in Europe.”

The KID issue arose in January, when MiFID II rules promoting clarity and transparency for investors came into force. The document isn’t impossible for U.S. ETP providers to create, but it does take time. Funds need to disclose information including pricing data, then compile other figures and guidance to pull one together. What’s more, the U.S. products are not intended for sale to retail investors in Europe, so there may just not be a point in an American issuer going through the process.

Analysts have said MiFID II would benefit European ETFs, with Bloomberg Intelligence estimating retail investors turning to the securities could help assets more than double to about $2 trillion in five years. With some of the most popular funds unavailable for purchase, the regional securities might get an additional boost.

“This makes investing in U.S. ETFs even more complicated for European-domiciled investors,” said Gregoire Blanc, head of ETF capital markets at Lyxor Asset Management in London, referring to the new regulation. “We are hearing this feedback from our clients.”

The alternatives? For SPY, European traders can go with the $2.8 billion SPDR S&P 500 UCITS ETF listed in London (ticker SPY5) by State Street Corp. or BlackRock Inc.’s $26 billion iShares Core S&P 500 UCITS ETF USD (CSPX), the biggest fund traded on a Western European bourse. For U.S. tech shares, there’s the $827 million iShares S&P 500 Information Technology Sector UCITS ETF USD (IUIT), and the $9.4 billion iShares Core MSCI EM IMI UCITS ETF USD (EMIM) tracks emerging markets.

Of course, the $178 million in inflows into SPY5 since January and $636 million last year are a drop in the ocean compared with the U.S. SPY.

The issuer of the most-popular ETF tracking the S&P 500 will “shortly be in a position” to provide the cost-related data needed to produce a KID, said Malcolm Smith, the global chief operating officer of the SPDR business. Even then, some of the U.S. ETFs may not be available to retail investors anytime soon.

“Certain of our U.S. ETFs are only registered for sale to professional investors in certain European markets so we do not feel it would be appropriate for us to create a PRIIP’s compliant KID document for such retail investors until our registrations permit the wider sale of our funds,” Smith said in an email.