Lyxor “not disappointed” with synthetic ETFs

Arnaud LlinasLyxor;s exchange-traded funds (ETF) chief says he is not disappointed with the performance of synthetic ETFs even though the firm is changing three of its products to physical replication.

As Funds Europe reported on Tuesday, Lyxor is converting a trio of ETFs that track French, Spanish and German equity indices to physical replication, meaning they will hold shares in the indices they track rather than use derivatives.

“It’s not a question of disappointment,” says Arnaud Llinas (pictured), head of ETFs and indexing. “It’s about having the capacity internally to provide an industrialised solution, which we have now.”

Seventy-five per cent of Lyxor’s ETF range by assets are constructed synthetically, the rest are physical.

But he also says that he felt synthetic replication had little value in the case of these three funds. Partly, this is because they are single-country funds.

“When you go into complex indices that cover a large number of countries or a region … I think synthetic construction is better in terms of tracking error and tracking difference.”

He says that the three funds would not engage in stock lending in the near term. Stock lending, a possibility for physical ETFs, is seen as a way for ETFs to lower fees and provide revenue for providers. But Llinas says there is no benefit in stock lending at present and it would not be permitted by the funds’ prospectuses.

“We will not stock lend in the short term because there is no benefit to do so. There is no real added value to it now and we also did not present [the possibility of it] in the fund prospectuses.”

Linas adds that investors would get a better tax treatment on dividends by having physically replicated ETFs domiciled in Europe.

Lyxor announced in September 2012 that it would launch a physical ETF range.

The announcement came against the backdrop of intense scrutiny of synthetic ETFs led by the European Securities and Markets Authority, which had recently concluded a study about synthetic ETF risks.

Lyxor is Europe’s third largest ETF provider and in May recorded sales of €2.5 billion during the first five months of the year and a subsequent 13% growth in assets since end of 2013.

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