Article

How does a swap-based ETF work?

16 December 2024
Invesco
How does a swap-based ETF work?

  • This marketing communication is exclusively for use by Qualified Clients/Sophisticated Investors in Israel. It is not intended for and should not be distributed to the public. Investors should read the legal documents prior to investing.

    An investment in the ETFs mentioned in this video is an acquisition of units in a passively managed, index tracking fund rather than in the underlying assets owned by the fund. Costs may increase or decrease as result of currency and exchange rate fluctuations. Consult the legal documents for further information on costs.

What is a swap-based ETF?

A swap-based ETF replicates the performance of a stock market index, without having to own the shares directly.

There are a number of good reasons for doing this but first of all we need to understand how they work.

Watch our short explainer video to find out more.

Transcript

Investment risks

The value of investments and any income will fluctuate (this may partly be the result of exchange rate fluctuations) and investors may not get back the full amount invested.

Synthetic ETFs may use derivatives for investment purposes. The use of such complex instruments may impact the magnitude and frequency of the fluctuations in the value of the fund.

Synthetic ETFs enter into transactions which expose it to the risk of bankruptcy, or other types of default, by the counterparties to those transactions.

Imagine you have a stock portfolio that's doing well, and your friend wants to get the same returns.

Problem is, they’re not able to buy the same stocks, in the same amounts, as you. Or maybe it would simply be too expensive for them to do so.

So, you come to an agreement:

Your friend promises to pay you a fee every month, if you ‘pay’ them the performance of your portfolio. Think of the fee as compensation for your hard work, and your commitment to help.

Your friend already has a portfolio that will generate some performance – some days perhaps more than yours and other days less – so you just need to make up any difference.

With this agreement, you are effectively swapping the performance of your portfolio, for the performance of their portfolio plus a fee.

Your friend receives any increase or decrease in your portfolio's value, and any dividends it pays – without having to own the same stocks as you directly.

To keep things manageable, you and your friend reset your agreement if the gap between the two portfolios has got a bit too big for comfort. You just settle the difference and keep going with a clean slate.

That, in a nutshell, is how swap-based ETFs, also referred to as synthetic ETFs, work. It’s a deal that one party (the ETF) gets the performance of a stock index like the S&P 500 Index or FTSE 100 Index, and the other (the counterparties) get the performance of the basket of stocks, with a fee on top. If done right, the benefits can include really precise index tracking, and occasionally a performance boost too.

Important information

Data as at 18 July 2024, unless otherwise stated.

This is marketing material and not financial advice. It is not intended as a recommendation to buy or sell any particular asset class, security or strategy. Regulatory requirements that require impartiality of investment/investment strategy recommendations are therefore not applicable nor are any prohibitions to trade before publication.

Views and opinions are based on current market conditions and are subject to change.

If investors are unsure if these products are suitable for them, they should seek advice from a financial adviser.

Related insights

  • For complete information on risks, refer to the legal documents.
    The value of investments and any income will fluctuate (this may partly be the result of exchange rate fluctuations) and investors may not get back the full amount invested.

    Invesco S&P 500 UCITS ETF: The Fund’s ability to track the benchmark’s performance is reliant on the counterparties to continuously deliver the performance of the benchmark in line with the swap agreements and would also be affected by any spread between the pricing of the swaps and the pricing of the benchmark. The insolvency of any institutions providing services such as safekeeping of assets or acting as counterparty to derivatives or other instruments, may expose the Fund to financial loss. The Fund might be concentrated in a specific region or sector or be exposed to a limited number of positions, which might result in greater fluctuations in the value of the Fund than for a fund that is more diversified. The value of equities and equity-related securities can be affected by a number of factors including the activities and results of the issuer and general and regional economic and market conditions. This may result in fluctuations in the value of the Fund. The fund might purchase securities that are not contained in the reference index and will enter into swap agreements to exchange the performance of those securities for the performance of the reference index. Invesco S&P 500 UCITS ETF GBP Hdg Acc, Invesco S&P 500 UCITS ETF EUR Hdg Acc: Currency hedging between the base currency of the Fund and the currency of the share class may not completely eliminate the currency risk between those two currencies and may affect the performance of the share class.

    Invesco S&P China A 300 Swap UCITS ETF: As a large portion of this fund is invested in less developed countries, investors should be prepared to accept a higher degree of risk than for an ETF that invests only in developed markets. The Fund’s ability to track the benchmark’s performance is reliant on the counterparties to continuously deliver the performance of the benchmark in line with the swap agreements and would also be affected by any spread between the pricing of the swaps and the pricing of the benchmark. The insolvency of any institutions providing services such as safekeeping of assets or acting as counterparty to derivatives or other instruments, may expose the Fund to financial loss. The Fund might be concentrated in a specific region or sector or be exposed to a limited number of positions, which might result in greater fluctuations in the value of the Fund than for a fund that is more diversified. The value of equities and equity-related securities can be affected by a number of factors including the activities and results of the issuer and general and regional economic and market conditions. This may result in fluctuations in the value of the Fund. The fund might purchase securities that are not contained in the reference index and will enter into swap agreements to exchange the performance of those securities for the performance of the reference index. The Fund’s performance may be adversely affected by variations in the exchange rates between the base currency of the Fund and the currencies to which the Fund is exposed.

    If investors are unsure if these products are suitable for them, they should seek advice from a financial adviser.

    Current tax levels and reliefs may change. Depending on individual circumstances, this may affect investment returns. 

  • This marketing communication is exclusively for use by Qualified Clients/Sophisticated Investors in Israel. It is not intended for and should not be distributed to the public. Investors should read the legal documents prior to investing.

    Data as at 12 September 2024, unless otherwise stated.

    By accepting this material, you consent to communicate with us in English, unless you inform us otherwise.

    This is marketing material and not financial advice. It is not intended as a recommendation to buy or sell any particular asset class, security or strategy. Regulatory requirements that require impartiality of investment/investment strategy recommendations are therefore not applicable nor are any prohibitions to trade before publication.

    Views and opinions are based on current market conditions and are subject to change.

    For information on our funds and the relevant risks, refer to the Key Information Documents/Key Investor Information Documents (local languages) and Prospectus (English, French, German), and the financial reports, available from www.invesco.eu. A summary of investor rights is available in English from www.invescomanagementcompany.ie. The management company may terminate marketing arrangements.

    UCITS ETF’s units / shares purchased on the secondary market cannot usually be sold directly back to UCITS ETF. Investors must buy and sell units / shares on a secondary market with the assistance of an intermediary (e.g. a stockbroker) and may incur fees for doing so. In addition, investors may pay more than the current net asset value when buying units / shares and may receive less than the current net asset value when selling them.

    Invesco S&P 500 UCITS ETF: The S&P®500 Index is a product of S&P Dow Jones Indices LLC or its affiliates (“SPDJI”), and has been licensed for use by Invesco. Standard & Poor’s® and S&P® are registered trademarks of Standard & Poor’s Financial Services LLC (“S&P”); Dow Jones® is a registered trademark of Dow Jones Trademark Holdings LLC (“Dow Jones”); and these trademarks have been licensed for use by SPDJI and sublicensed for certain purposes by Invesco. Invesco S&P 500 UCITS ETF is not sponsored, endorsed, sold or promoted by SPDJI, Dow Jones, S&P, or their respective affiliates and none of such parties make any representation regarding the advisability of investing in such product(s) nor do they have any liability for any errors, omissions, or interruptions of the S&P®500 Index.

    Invesco S&P China A 300 Swap UCITS ETF: The S&P China A 300 Index is a product of S&P Dow Jones Indices LLC or its affiliates (“SPDJI”), and has been licensed for use by Invesco. Standard & Poor’s® and S&P® are registered trademarks of Standard & Poor’s Financial Services LLC (“S&P”); Dow Jones® is a registered trademark of Dow Jones Trademark Holdings LLC (“Dow Jones”); and these trademarks have been licensed for use by SPDJI and sublicensed for certain purposes by Invesco. The Invesco S&P China A 300 Swap UCITS ETF is not sponsored, endorsed, sold or promoted by SPDJI, Dow Jones, S&P, or their respective affiliates and none of such parties make any representation regarding the advisability of investing in such product(s) nor do they have any liability for any errors, omissions, or interruptions of the S&P China A 300 Index.

    No action has been taken or will be taken in Israel that would permit a public offering of the Fund or distribution of this document to the public.  This Fund has not been approved by the Israel Securities Authority (the ISA). The Fund shall only be sold in Israel to an investor of the type listed in the First Schedule to the Israeli Securities Law, 1968, who in each case have provided written confirmation that they qualify as Sophisticated Investors, and that they are aware of the consequences of such designation and agree thereto and further that the Fund is being purchased for its own account and not for the purpose of re-sale or distribution other than, in the case of an offeree which is an Sophisticated Investor, where such offeree is purchasing product for another party which is an Sophisticated Investor. This document may not be reproduced or used for any other purpose, nor be furnished to any other person other than those to whom copies have been sent. Nothing in this document should be considered investment advice or investment marketing as defined in the Regulation of Investment Advice, Investment Marketing and Portfolio Management Law, 1995 (“the Investment Advice Law”).  Neither Invesco Ltd. nor its subsidiaries are licensed under the Investment Advice Law, nor does it carry the insurance as required of a licensee thereunder. This document does not constitute an offer to sell or solicitation of an offer to buy any securities or fund units other than the fund offered hereby, nor does it constitute an offer to sell to or solicitation of an offer to buy from any person in any state or other jurisdiction in which such offer or solicitation would be unlawful, or in which the person making such offer or solicitation is not qualified to do so, or to a person to whom it is unlawful to make such offer or solicitation.

    For the full objectives and investment policy please consult the current prospectus.

    Invesco Asset Management Limited, Perpetual Park, Perpetual Park Drive, Henley-on-Thames, Oxfordshire RG9 1HH, UK. Authorised and regulated by the Financial Conduct Authority.

    EMEA4088648/2024