A turning point has been reached in the land of ETFs, paving the way for smoother terrain ahead. In the past, the fledgling industry has experienced a slightly rocky road, with providers pitting the merits of their preferred replication method against each other.
Debate ensued, with proponents of traditional replication advocating their method as simple to understand and lacking in counterparty risk, while other product providers touted synthetic replication as superior in offering lower tracking error.
But the days of solely promoting one replication method are over. Spurred by the attraction of offering access to the emerging markets, providers once seen as the bastions of physical replication have “evolved” to offer synthetic exposure to the likes of China, India and Russia.
Obviously, there is still competition and providers aren’t skipping around hand in hand, but this is certainly a positive development for the industry. Especially in a relatively young market, where conflicting messages about replication methods could potentially thwart its growth and hinder competition with other types of investment vehicles.
Both Credit Suisse and iShares launched a range of synthetic ETFs in September, including funds offering exposure to the emerging markets. However, rather than just manoeuvre into the swap-based sphere, these providers are dubbing their new ranges as part of an “evolution” and “new generation,” with an emphasis on transparency. Key to this development is the need to disclose the level and type of collateral and show how often the swap is reset. Such an emphasis on these factors may help drive the whole industry towards greater transparency, while allowing for more banks to get involved in providing swaps, as the synthetic model develops.
To promote 'long-term investment'
Switching 'hard and expensive'
Smaller funds still packing a punch
To drive progress