Invesco’s MSCI World UCITS ETF tops $2bn as investors embrace synthetic ETFs

Oct 14th, 2020 | By | Category: ETF and Index News

Invesco’s MSCI World UCITS ETF (MXWO LN) has surpassed $2 billion in assets under management having added almost $1bn year to date.

Invesco’s MSCI World UCITS ETF tops $2 billion as investors embrace synthetic ETFs

Invesco’s MSCI World UCITS ETF has topped $2 billion in assets under management as investors embrace synthetic ETFs.

The synthetic (or swap-based) ETF is now the issuer’s fourth-largest ETF in Europe after its gold, S&P 500, and Nasdaq-100 products.

Invesco, along with other issuers of swap-based ETFs, such as Lyxor, DWS and Amundi, has seen robust demand in 2020 as increasing numbers of investors opt for synthetic products.

The reason for this trend is primarily performance, which, in turn, is largely to do with dividends and the application of withholding taxes by countries around the world – the most pertinent of which for European-based investors is the United States.

Using the US as an example, non-US investors are hit with withholding tax on income received from dividends paid out by US companies – the companies retain the tax to pass on to the government. The rate is 15% for Irish-domiciled funds and 30% for Luxembourg funds – Ireland has a favourable tax treaty. As synthetic ETFs do not own the exact underlying securities (substitute collateral baskets typically hold non-distributing US stocks and/or non-US securities) and owing to the way the swap arrangements are configured (see US HIRE Act 871(m)), these funds are essentially not subject to this tax.

Receiving 100% of dividend income, as opposed to 85% or 70%, in the case of US stocks, leads to an immediate performance enhancement compared to traditional physical funds. And while there is nothing particularly new about this approach, it seems to be gaining traction again as investors focus on the bottom line and memories of the financial crash (and the spectre of bank defaults) wane.

The performance enhancement, combined with tracking accuracy, is demonstrable. According to Invesco, its S&P 500, MSCI USA and MSCI World UCITS ETFs have outperformed the average of their largest physically replicated competitors by 0.24%, 0.31% and 0.14% respectively over the 12 months to the end of September 2020. Over the past three years, these figures are 0.73%, 0.70% and 0.23%, underscoring the long-term relative outperformance potential of synthetic products.

According to Invesco, the Invesco S&P 500 UCITS ETF has seen the largest inflows of any competing product in Europe this year, with over $1bn of additional new assets to September-end, compared to over $6bn of outflows from the rest of the S&P 500 UCITS ETF sector. Assets in this fund now stand at more than $11bn, making it the largest synthetic ETF in Europe

Christopher Mellor, Head of EMEA ETF Equity & Commodity Product Management at Invesco, said: “The benefits of synthetic replication are increasingly being realised by investors. The method not only allows for more accurate tracking of the index, but can also offer a reduction in risk, with higher returns versus physical products and outperformance above the index.

“Our MSCI World product has seen very strong growth in 2020, much like our S&P 500 product, as investors look for competitive core investments. We expect continued reallocation from investors to synthetic products looking forwards.”

Invesco MSCI World UCITS ETF - Monthly Flows (left) and Cumulative AUM (right)

Invesco MSCI World UCITS ETF – Monthly Flows (left) and Cumulative AUM (right)

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