BlackRock has launched a new ETF in Europe providing synthetically replicated exposure to developed market equities.
The fund is BlackRock’s third ETF providing synthetically replicated equities exposure.
The iShares MSCI World Swap UCITS ETF (IWDS NA) has been listed on Euronext Amsterdam in US dollars.
The fund uses total return swaps to track the MSCI World Index, a market capitalization-weighted reference for large and mid-cap stocks listed across 23 developed market countries worldwide.
The popularity of synthetically replicated ETFs declined sharply following the global financial crisis due to concerns over counterparty and liquidity risks with many issuers converting their products to physical replication in the aftermath.
Swap-based ETFs have since enjoyed a revival, however, as investors have become reacquainted with the benefits of the structure’s inherent tax advantages in certain circumstances.
These tax advantages primarily relate to dividends. Most notably, non-US investors are hit with withholding tax on income received from dividends – 15% for Irish-domiciled funds and 30% for Luxembourg funds. As synthetic ETFs do not own the exact underlying securities (substitute baskets typically hold non-distributing US stocks and/or non-US securities) and owing to the way the swap arrangements are configured and treated from a regulatory perspective, they are not liable for this tax, leading to immediate performance enhancement.
Another advantage of synthetic ETFs is that they typically offer a lower tracking error compared to their physically replicated counterparts, although this benefit is most pronounced when the fund targets illiquid stocks such as emerging market equities.
BlackRock’s synthetically replicated MSCI World ETF comes with an expense ratio of 0.20% which is considerably lower than the price tag of the firm’s physically replicated ETF tracking the same index – the $7 billion iShares MSCI World UCITS ETF (IWRD LN) has an expense ratio of 0.50%.
The fund is BlackRock’s third synthetically replicated equity ETF with the existing two products focused on US equities – the $4.4bn iShares S&P 500 Swap UCITS ETF (I500) and $600m iShares MSCI USA Swap UCITS ETF (MUSD) come with expense ratios of 0.05% and 0.07%, respectively.