Invesco expands its synthetic range on the LSE: the MSCI North America Swap ETF launches with a TER of 0.08%

Invesco is today listing a new synthetic equity ETF focused on the North American market on the London Stock Exchange.

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Article created by the editorial staff of ETFWorld.co.uk

Matthew Tagliani, Head of ETF Product EMEA at Invesco

This is the Invesco MSCI North America Swap UCITS ETF Acc (ISIN IE0002LUYGW0), which joins the issuer’s already extensive range of products for the North American region.

The product features a total annual expense ratio (TER) of 0.08%, making it one of the most cost-effective options available on the Borsa Italiana for investors seeking combined exposure to the US and Canada in a single instrument. The listed class is a reinvestment class.

Benchmark index: what the MSCI North America covers

The ETF tracks the performance, in terms of total net return, of the MSCI North America Index. The index measures the performance of large- and mid-cap equities in the United States and Canada, covering approximately 85% of the free-float-adjusted market capitalisation of the two markets.

The US component accounts for the vast majority of the basket, whilst the Canadian exposure adds sectoral diversification that the MSCI USA alone does not offer, particularly in energy, commodities and financials listed in Toronto. For Italian investors, the MSCI North America therefore represents a broader alternative to US-only indices such as the S&P 500 or the MSCI USA itself, whilst remaining dominated by the major US stocks.

Synthetic replication using unfunded swaps

The ETF employs synthetic replication based on unfunded swap contracts. The fund holds a basket of equities that generates most of the return, but which typically deviates from that of the index. The difference between the basket’s return and that of the index is exchanged with one or more authorised counterparties via swaps.

The stated objective is to achieve a performance more consistent with that of the index than would generally be possible with physical replication alone. This is a widespread approach in new-generation synthetic products, which combine real equity collateral with a return-swapping mechanism to reduce tracking error.

A key technical aspect concerns the reference for the swaps: the fund’s objective is to track the net total return version of the index, but the swaps entered into refer to the gross total return version. The swap fee is calculated on the gross version. As a result of this structure, the ETF’s performance may exceed the return of the net benchmark index. This is a structural advantage typical of synthetic replication applied to US markets, where the differential between the gross and net indices reflects the withholding tax on dividends that an investor using physical replication would incur.

Contribution from swap counterparties

The product document specifies that the manager may require swap counterparties to contribute towards covering some of the fund’s ongoing costs. The maximum contribution is 0.075% of the annual net asset value. This contribution does not affect the fund’s performance or returns to investors: it is a mechanism that operates at the level of the product’s structural framework.

Combined with the stated TER of 0.08%, this component confirms the cost-competitive approach that Invesco has applied in recent years to its swap-based range across the major developed markets.

Passive management and nature of the investment

The fund is passively managed. The documentation clarifies an aspect that deserves investors’ attention: subscribing to units of this ETF means acquiring holdings in a fund that replicates the index through a combination of a basket and swaps, and not direct exposure to the underlying assets that the fund physically holds. The physical basket constitutes the collateral, whilst the final return depends on the swap mechanism.

Positioning within the Invesco range

With this listing, Invesco strengthens its synthetic offering in North American equities. The new product offers an alternative for investors wishing to include Canada in their allocation via a single instrument, whilst retaining the tax-efficient characteristics typical of synthetic trackers on US markets.

The TER of 0.08% brings the product into line with the positioning of its main competitors in the North American synthetic replication segment, in a market environment where cost competition among issuers on major developed indices has intensified further over the last two years.

Source: ETFWorld.co.uk