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Synthetic ETFs Die Out In Australia

Written by Staff

October 14, 2011 19:21 (CET)

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 indexes, 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 this year on the potential risks involved in synthetic ETFs.

Drew Corbett, head of investment strategy and distribution at BetaShares, said in an interview with InvestorDaily: “We felt that the new investment strategy, being physical replication, would be an improved structure that adds more comfort to investors.”

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 gain exposure to some asset classes and offering low performance hit in tracking, such ETFs could pose counterparty risks and higher complexity.




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