![]() “What you have in that direct replication scenario is hope. Physical ETFs do not necessarily fare better in these episodes, though, he argued. ![]() Mohr said he had seen structural market risks, as in Nigeria’s case, or geopolitical risks, as with Russia, blow a hole in synthetic ETFs twice in his 25-year career, with both occurring in the past two years. Michael Mohr, global head of Xtracker products, struck a similar note. “There are many funds out there that still technically hold Russian equities but are unable to sell them,” he said. He cited the example of Russian stocks being removed from emerging market benchmarks in 2022 when the country launched its full-scale invasion of Ukraine. However, Lamont said that “in many cases the outcome for investors would be similar” between synthetic and physical funds. Given that liquidity in the Nigerian stock market itself has always been adequate, that suggests investors in a physically replicated ETF would not have seen their Nigerian holdings marked down to zero, even if there had been a delay in receiving the proceeds from their sale.Ī number of physical ETFs, such as the iShares Frontier and Select EM ETF ( FM) and VanEck Africa Index ETF ( AFK), happily hold fully valued Nigerian stocks in their portfolios. “That tends to suggest the blockages that made it hard to get the money out are easing,” he added. However, Robertson said “it looks like the FX market has now gained liquidity”, with some foreign investors now putting money into Nigeria as the exchange rate has become more realistic. You might have to wait three months or longer,” he said. “You could put money in easily enough but you couldn’t get it out. The central bank has since adopted a “willing-buyer and willing-seller” model, with the Nigerian naira allowed to float more freely and the exchange rate determined by market forces.Ĭharlie Robertson, head of macro strategy at FIM Partners, an asset manager specialising in emerging and frontier markets, said that under the old regime investors had faced barriers in repatriating money. Nigeria has long suffered from a scarcity of foreign exchange, with even importers of many goods barred from accessing dollars at the official exchange rate until Bola Tinubu, the current president, took over in May. S&P Dow Jones removed Nigeria from the Select Frontier index due to “significant delays in capital repatriation” for those selling Lagos-listed stocks. “This can be seen as a structural disadvantage of swap-based exposures, as physical managers have more flexibility to trade around such events,” said Kenneth Lamont, senior fund analyst for passive strategies at Morningstar. In contrast, a physical index-tracking ETF or mutual fund would - in theory at least - have been able to sell the Nigerian holdings and plough the proceeds back into the fund. ![]() As a result, this portion of the fund’s portfolio has been written down to zero. However, on November 1, S&P Dow Jones Indices stripped Nigeria from the S&P Select Frontier index that the ETF tracks at a “zero-price”. Nigerian stocks accounted for 4.8 per cent of the £68mn Xtrackers S&P Select Frontier Swap Ucits ETF ( DX2Z) until October 31. The losses may expose a hitherto unidentified weakness of the synthetic ETF structure, which relies 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 physically replicated ETF does. Investors in a derivative-linked “synthetic” exchange traded fund have been left out of pocket after Nigeria was axed from its underlying index. ![]() Visit our ETF Hub to find out more and to explore our in-depth data and comparison tools
0 Comments
Leave a Reply. |
AuthorWrite something about yourself. No need to be fancy, just an overview. ArchivesCategories |