“You will definitely see synthetic ETFs listed here and in some cases that will be entirely appropriate. There’s got to be some types of exposure that will be in demand from investors that can only be delivered via derivatives,” he says.
Whether Australia will adopt the synthetic replication to the same extent that Europe has appears to be a question of how strict the regulator decides to be.
In the meantime, investors should take comfort in knowing the Australian market is tightly regulated. ASX-quoted ETFs were first offered for trading over certain S&P/ASX indices in August 2001. ASIC restricted counterparty exposure to no more than 10 per cent when BetaShares listed two synthetically-enhanced ETFs.
Richard Murphy, ASX general manager equity markets, says that ETF products must “meet ASX rules and policy position on ETFs, including ASX’s and ASIC’s positions on synthetic and inverse ETFs, which is to say, we allow them with a range of limitations and additional requirements”.
Accordingly, synthetic ETFs that use deriva- tives are allowed on the Australian exchange, subject to ASX rules.
“ASX is progressing rules with ASIC aimed at formalising these arrangements, which have been imposed on a contractual basis for the first ETFs in this space,” Murphy says.
Blackrock’s Keenan says it’s vital to ensure that the industry exercises due diligence when it comes to ETFs, just like any other product, and that it’s important for investors to understand that not all ETFs are created equal.
“There are big differences in the way they can be brought to market,” he says.
“Don’t read the word ‘ETF’ and think they’re all the same, because they simply are not.”
