Australian fund manager Betashares has restructured its two synthetic replication-based ETFs to follow the physical replication method.

The funds, BetaShares S&P/ASX 200 Financials Sector ETF (QFN) and BetaShares S&P/ASX 200 Resources Sector ETF (QRE), that track the financials and resources indices respectively, were the last remaining synthetic funds in Australia. The fees for the products remain unaffected.

Instead of holding securities, synthetic ETFs meet their investment objectives by entering into a contractual agreement with a counterparty, using derivatives such as total return swaps. The counterparty then promises to return the performance of the benchmark to the fund.

The switch is a fresh evidence of mounting pressure on fund managers, following a spate of regulatory warnings in the past year on the potential risks involved in synthetic ETFs. In August, the Australian Securities and Investments Commission (ASIC) raised the alarm on synthetic ETFs, saying that whilst the products were beneficial in allowing investors to gain exposure to some asset classes and offering low performance hit in tracking, such ETFs could pose counterparty risks and higher complexity.