European funds investing in U.S. equities have seen significantly lower returns compared to their U.S.-domiciled counterparts, sparking increased demand among asset managers for the European Union to reduce fund settlement times.
An analysis by Ignites Europe, drawing on Morningstar data, suggests that the shift in the U.S. to a shorter settlement cycle—moving from two days after the trade date (T+2) to just one day (T+1)—is negatively impacting European investors. This confirms concerns raised by asset management executives about the disparities between settlement times in Europe and the U.S.
Since the U.S. implemented the T+1 settlement cycle on May 28, the average total returns for Europe-domiciled funds investing in U.S. equities have trailed those of similar U.S.-based funds. This trend is particularly evident when examining passive funds tracking the S&P 500, where European-domiciled funds have consistently posted lower average returns compared to their U.S. counterparts.
Specifically, the total returns for EU-domiciled S&P 500 tracker funds and ETFs between the start of T+1 and the end of July have been 14 basis points lower than those for U.S.-domiciled products, at 4.14% and 4.28% respectively. When examining weekly return data up to August 3, the difference widens to 20 basis points.
Historically, over the past one and three years, U.S.-based funds tracking the S&P 500 have slightly underperformed compared to similar products in Europe. However, the recent data indicates that the shift to T+1 is having a detrimental effect on European funds and their clients, as experts had anticipated.
A source from a major asset management firm, speaking anonymously, noted that operating and trading in Europe has become more expensive since the U.S. transitioned to T+1. This change particularly impacts exchange-traded funds (ETFs) and other products at firms with less global reach, as they struggle to adjust their processes to non-European jurisdictions.
Jim McCaughan, U.S. practice leader at asset management consultancy Indefi, stated that the misalignment between U.S. and European settlement cycles could lead to “a measurable drag on performance,” depending on the fund’s strategy and accounting methods. McCaughan explained that the disparity between buying and selling cycles for U.S. and European equities might force funds to borrow money to cover funding gaps or require brokers to settle on a later cycle, both of which could incur additional fees.
The European Union is currently considering whether to follow the U.S. in reducing settlement cycles from T+2 to T+1. The current misalignment has been blamed for increasing trading costs for European fund managers, ultimately reducing returns for investors in the region.
The European Securities and Markets Authority (ESMA) is expected to release its recommendations on whether the EU should adopt T+1 in the coming months, with a potential switchover in 2027.
Vincent Ingham, director of regulatory policy at the European Fund and Asset Management Association, expressed concern at an ESMA hearing last month, stating that “the current misalignment is producing a substantial cost factor for the European buy side that deteriorates the performance of our funds.” He emphasized that these lower returns would “ultimately be borne by end investors.”
Adrian Whelan, global head of market intelligence at Brown Brothers Harriman, added that the increased trading costs for EU funds following the U.S. move to T+1 highlight the critical need for a similar shift in Europe, which would “remove this funding gap instantaneously.”
Whelan also pointed out that while T+1 cannot be definitively blamed for reduced EU fund performance, there are two key factors increasing general trading costs for non-U.S. managers due to T+1. He cited the tightening of trade affirmation deadlines to 9 p.m. U.S. Eastern time on the trading date, which, if missed, leads to higher settlement costs as trades are processed in later batches. Additionally, he noted the emergence of “unusual trading patterns” on Thursdays when trading U.S. securities becomes more expensive due to the need to hedge trades for the three-day weekend.
This situation, Whelan explained, creates higher margin requirements for brokers, who in turn charge higher spreads, further reducing market liquidity. The “funding anomaly” is particularly pronounced for European funds, where investor subscription and redemption cycles remain on a T+2 schedule.
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