BlackRock has expanded its suite of synthetically replicated ETFs in Europe with the launch of two new funds providing exposure to small-cap and large-cap growth segments of the US equity market.
BlackRock now offers five synthetically replicated equity ETFs in Europe.
The iShares Russell 2000 Swap UCITS ETF (RU2K LN) and iShares Nasdaq 100 Swap UCITS ETF (N100 LN) have been listed on the London Stock Exchange in pound sterling and on Euronext Amsterdam in euros.
Both ETFs come with expense ratios of 0.20%.
RU2K tracks the Russell 2000 Index, which comprises small-cap US equities, while N100 provides synthetic exposure to the Nasdaq 100, which includes 100 of the largest non-financial companies listed on the Nasdaq
Both funds use unfunded total return swaps to replicate their indices, offering investors an efficient means of gaining exposure to these equity segments.
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.
The launch of RU2K and N100 brings BlackRock’s suite of synthetic equity ETFs in Europe to five products with the existing three funds providing US large-cap (S&P 500), US total market (MSCI USA), and global developed (MSCI World) exposures.