Investors in a derivative-linked “synthetic” exchange-traded fund have been left out of pocket after Nigeria was axed from its underlying index, according to a report by the Financial Times.
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.
Nigerian stocks accounted for 4.8 per cent of the £68mn Xtrackers S&P Select Frontier Swap Ucits ETF (DX2Z) until October 31.
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.” As a result, this portion of the fund’s portfolio has been written down to zero.
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.
About the Author
Discover more from VOICE OF THE PEOPLE
Subscribe to get the latest posts sent to your email.
