BlackRock has launched a new ETF in Europe providing synthetically replicated exposure to the US large and mid-cap equity market.
The fund is BlackRock’s second ETF providing synthetically replicated exposure to US equities.
The iShares MSCI USA Swap UCITS ETF has been listed on Euronext Amsterdam in US dollars (MUSD NA) and on Euronext Paris in euros (MUSA FP).
The fund uses total return swaps to track the MSCI USA Index, a market capitalization-weighted reference for large and mid-cap stocks listed in the US.
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 are enjoying 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 USA ETF comes with an expense ratio of 0.07% which is considerably lower than the price tag of the firm’s physically replicated ETF tracking the same index – the $480m iShares MSCI USA UCITS ETF (CSUS LN) has an expense ratio of 0.33%.
The fund is BlackRock’s second synthetically replicated US equity ETF following the September 2020 launch of the iShares S&P 500 Swap UCITS ETF (I500 LN). I500 has accumulated over $2.5 billion in assets and its expense ratio is also 0.07%, matching the cost of BlackRock’s physically backed S&P 500 ETF.