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BlackRock performs volte-face with swap-based equity ETF

The world’s largest asset manager has launched its first synthetic ETF after years spent criticising the structure

BlackRock has performed a volte-face and launched its first swap-based equity exchange traded fund, entering a market it had avoided for nearly a decade following chief executive Larry Fink’s vehement criticism of the structure.

“BlackRock has been the flag-bearer for physical ETFs for many, many years. They were very critical of the idea of synthetic ETFs and here they are launching one,” said Jose Garcia-Zarate, associate director of ETF strategy at Morningstar, the fund data provider.

So-called synthetic ETFs rely on having a swap contract in place with a counterparty to replicate the performance of the underlying assets, rather than actually owning the assets themselves, as a “physical” ETF does.

They fell out of favour in the wake of the global financial crisis when regulators such as the Financial Stability Board and IMF raised concerns over counterparty and liquidity risks, but have started to attract interest recently due to their tax advantages.

BlackRock has come to the realisation that some investors are wising up. Money talks and you have to give your clients what they are demanding

Mr Fink had in the past warned that derivatives-based ETFs exposed investors to unacceptable levels of counterparty risk and were “just a contract between a buyer and seller”. He criticised the level of transparency of some the funds, particularly when the counterparty was ultimately the same company as the issuer.

The derivatives-based versions of its $50bn iShares Core S&P 500 Ucits ETF that it listed on Euronext, the London Stock Exchange and Frankfurt’s Xetra exchange this week are BlackRock’s first foray into synthetic equity ETFs. It said it had no plans to launch any more.

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Steve Johnson

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