On 10 March 2016, Lyxor switched its Japanese TOPIX ETF (JPN) to a physically replicated structure in a move that takes the provider’s product line closer to its goal of 50% physical ETF assets. Following the switch, the third largest ETF provider in Europe by assets under management (AUM) has over 46% (€20.6bn) of its assets invested in physically-replicating ETFs.

Arnaud Llinas, global head of ETFs and indexing at Lyxor.

The Lyxor UCITS ETF Japan was the firm’s first Asian equity ETF when it launched in 2005 and has over €1bn in AUM making it the largest ETF in Europe for the Topix Index – a leading reference for Japanese equities representing over 1,800 companies listed on the Tokyo Stock Exchange. The fund is classified as one of Lyxor’s ‘Essential’ core benchmark exposures. Converting it to physical replication brings it in line with the Lyxor JPX-Nikkei 400 UCITS ETF, which is also physical.

Commenting on the switch, Arnaud Llinas, Head of ETFs and Indexing at Lyxor, said: “We are one step closer to delivering a true ‘best of both worlds’ approach to replication. This is essential in our ambition to maintain the highest levels of tracking precision and trading efficiency across the whole range.”

Lyxor began launching physically replicated ETFs in 2012, following criticism over the risks associated with swap-based (synthetic) ETFs. The firm currently has 37 physical ETFs, primarily from the suites of broad developed market exposures. Lyxor still offer synthetically replicated ETFs for certain asset categories, including harder to reach exposures such as emerging markets where it can be more efficient.

Speaking exclusively to ETF Strategy earlier in the month, Llinas said: “We haven’t shied away from synthetic products and will use them when they are the right product to use. Professional investors understand this. One type of replication does not fit all. For example, when you access corporate bonds or high-yield indexes, being able to use the derivatives market is a very powerful tool and helps to make the tracking of these ETFs extremely good.”