ETF Securities, the London-based ETC and ETF provider, is promoting the use of multiple swap counterparties within its recently-launched ETFs.

ETF Securities, the London-based ETC and ETF provider, is promoting the use of multiple swap counterparties within its recently-launched ETFs.

Claiming that multiple swap counterparties offer operational efficiencies over in specie ETFs and ETFs with a single swap provider, ETF Securities has applied the label "third generation ETFs" to the new structure.

ETF Securities currently manages 13 ETFs, in addition to its range of exchange-traded commodities.

In a presentation to investors made earlier today Hector McNeil, Managing Partner of ETF Securities, pointed out that "first generation" (in specie) ETFs, which track indices by owning the underlying securities, can suffer from a number of costs, causing tracking error.  These include: the cost of delivering a basket of securities, especially for ETFs tracking broader indices; cash drag when reinvesting dividends; and rebalancing costs when index constituents change.  "Second generation" ETFs, those with a single swap provider, would have difficulty replacing the swap counterparty in the case of the latter's failure, according to ETF Securities, leading to the likely liquidation of the ETF after such an event, with assets being returned to investors.

The multiple swap counterparty model being operated by ETF Securities allows for the easy replacement of swaps in the case of a bank failure, according to McNeil, and greater liquidity for investors, since the structure promotes price competition and more efficient arbitrage between the authorised participants and market makers.