Lyxor ETFs: Let's Get More Physical

In a move welcomed by Morningstar analysts, Europe's third largest ETF provider is switching more of its funds to a physical replication model 

Dimitar Boyadzhiev 9 November, 2015 | 10:19AM
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Lyxor is switching more ETFs from synthetic to physical replication in a move that will result in more than half of the firm’s ETF assets using physical replication.  

We welcome this move, which is part of an industry-wide trend, witnessed across Europe and especially in the UK, driven by investor preference for physical ETFs over their synthetic counterparts. At the same time, the cost of synthetic replication, which involved the use of swaps, has increased over the past few years due to new banking regulations, making physical replication a more efficient method in some markets.

Lyxor, Europe’s third largest ETF provider, began its switch to physical replication in 2012.

Currently, a quarter of Lyxor’s assets under management are physically replicated and the firm expects to see this proportion grow to 52% by the end of 2016.

The Lyxor Euro Stoxx 50 ETF (MSED), Lyxor’s flagship ETF, was already converted to a physical replication model on November 3rd.  Lyxor claims the switch will result in the ETF extending its outperformance over the benchmark by a further 0.15%, representing three-quarters of its 0.20% ongoing charge. 

The next ETFs to be switched by Lyxor, scheduled to change over the course of 2016, are those tracking the MSCI's EMU, TOPIX, Europe, USA and World indices, i.e. the Lyxor MSCI EMU ETF (MFE), Lyxor Japan (TOPIX) ETF (JPNL), Lyxor MSCI Europe ETF (MEUG), Lyxor MSCI USA ETF (USAL) and the Lyxor MSCI World ETF (WLDL), respectively. The firm said that this particular line-up is driven by the specifics of the underlying markets and the ability of its portfolio managers to deliver superior tracking.

Emerging markets, strategic beta, credit and commodities strategies will continue to use synthetic replication because of their relative complexity and hard-to-access nature. Similarly, the Lyxor FTSE 100 ETF [L100] will continue to be replicated using swaps as they allow the fund to circumvent the 0.50% stamp duty on UK equities.

Deutsche Asset and Wealth Management, Europe’s second largest ETF provider, has already moved a significant proportion of its db x-trackers ETFs from synthetic to physical replication over the past three years, with its ETF assets now equally spread between the two replication methods. 

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

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Securities Mentioned in Article

Security NamePriceChange (%)Morningstar
Rating
Lyxor Core Europe Stoxx 50 DR ETF Acc GBP  
Lyxor Japan Topix DR ETF Dist EUR GBP13,444.00 GBX0.28Rating
Lyxor MSCI Europe (DR) ETF Acc GBP15,839.00 GBX2.29Rating

About Author

Dimitar Boyadzhiev  is a Passive Strategies Research Analyst for Morningstar

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