Industry Updates

State Street to fully replicate three emerging market ETFs

EMAD, EMRD and EDVD will switch to being fully replicated

Lauren Gibbons

Emerging markets south-east Asia

State Street Global Advisors (SSGA) is set to fully replicate the underlying index of three emerging markets ETFs.

In a shareholder notice, SSGA said the investment strategy for the SPDR MSCI EM Asia UCITS ETF (EMAD), the SPDR MSCI Emerging Markets UCITS ETF (EMRD) and the SPDR S&P Emerging Markets Dividend Aristocrats UCITS ETF (EDVD) will be switched to fully replicating.

Under an optimised strategy, an ETF will typically hold only a subset of the securities included in the index which can lead to higher tracking error.

A full replication strategy means the SSGA's ETFs will physically hold all the securities of their respective indices.

It comes after SSGA made similar changes in October 2023 across three global equity ETFs, the SPDR S&P Global Dividend Aristocrats UCITS ETF (GLDV), the SPDR S&P Global Dividend Aristocrats ESG UCITS ETF (GEDV) and the SPDR S&P Pan Asia Dividend Aristocrats UCITS ETF (ASDV).

The changes also allowed it to take advantage of the increased diversification limits under UCITS rules, meaning it can hold up to 20% in an individual company.

By following the optimised approach, the ETFs adhere to the 5/10/40 rule for UCITS which means the maximum weight to a single security can be above 10% only if the top four holdings do not exceed 40%.

A minimum of 12 stocks can then be used to fill up the remaining 60% of the basket at a 5% allocation each.

When the ETF tracks an index with a single weighting above 10%, it must track away from the index to remain UCITS compliant.

However, by becoming fully replicating, EMAD, EMRD and EDVD will move to the 20/35 rule, meaning they can take higher concentrations of up to 20% in a single security.

This limit can then be raised to 35% in a single issuer during exceptional circumstances such as when one issuer exhibits dominance within their respective market.

BlackRock also made similar changes to several of its ETFs earlier this year, which included the iShares MSCI USA ESG Screened UCITS ETF (SDUS), the iShares MSCI EM ESG Enhanced UCITS ETF (EDG2) and the iShares Digital Entertainment and Education UCITS ETF (PLAY).

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