iShares has unveiled its inaugural UK range of swap-based ETFs, based on the multiple swap counterparty model, to provide exposure to India and Russia.
The ETF issuer says this development comes in response to growing investment interest in difficult to access markets, where the benchmark indices can be hard to traditionally replicate with low tracking error.
iShares has previously only launched fully-replicated ETFs, with the exception of a small range of 19 products listed in Germany, and says this swap-based fund launch is part of an "evolution" in the industry.
As part of this evolution, the new swap-based platform uses a range of counterparties, while the ETFs are over-collateralised and disclose collateral holdings, swap costs and fund exposures.
The three counterparties backing the ETFs include RBS, UBS and Credit Suisse. iShares says the risk management benefits, in terms of mitigating sole counterparty risk, and the competitive swap pricing is of "paramount" importance to investors.
iShares EMEA head of product development Axel Lomholt says: "This initiative is an important expansion of the iShares product set and reinforces our position as the market leader in one of the fastest growing areas of fund management."
However, he adds: "iShares remains committed to its physically-backed ETF structure offering, which we believe continues to be the most effective and efficient way for investors to access mainstream asset classes, and will always be our first option when launching products."
The first two ETFs listed on the London Stock Exchange comprise the iShares MSCI Russia Capped Swap ETF, tracking the MSCI Russia Capped index with a total expense ratio (TER) of 0.74%, and the iShares S&P CNX Nifty India Swap ETF, replicating the S&P CNX Nifty India Index with a TER of 0.84%.
iShares says it will primarily focus on creating swap-based funds where exposure cannot be efficiently provided in line with Ucits III rules and the physical replication method of buying the underlying stocks.
The ETFs are over-collateralised with equity by up to 120%. Both liquid collateral and over-collateralisation mitigate counterparty default risk, as "over collateralisation" means the market value of collateral taken exceeds the overall counterparty exposure.
Lomholt adds: "Counterparty risk and transparency have been the driving concerns for investors using swap-based ETF structures. Considering this, iShares has engineered an enhanced platform following a unique model which, coupled with an over collateralised and highly transparent fund structure, helps to significantly minimise counterparty risk for investors."
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