The Invesco S&P 500 UCITS ETF (SPXS) witnessed $500m net inflows during the first six weeks of this year following strong demand in 2019.
The strong inflows show investors are becoming less resistant to synthetic ETFs especially with US equities where the replication method has some clear advantages.
US equity ETFs, synthetically replicated, capture the dividends on the index constituents gross of tax while physically-backed ETFs in this asset class have to pay dividend withholding tax.
Gary Buxton (pictured), head of EMEA ETFs at Invesco, added: “The strong flows into synthetic S&P 500 ETFs in 2019 amid weaker demand for physical versions suggest investors are becoming more agnostic to the replication method.
“Investors appear to be selecting products not only on cost but also on which specific product offers the greatest potential for delivering the desired outcome.”
Up until the Great Financial Crisis in 2008, synthetic and physical ETFs, which own the underlying assets they track, saw similar flows into their products. However, this changed in 2011 after warnings from the IMF and Financial Stability Board, both of which were unconvinced by swaps in the aftermath of 2008.
It is thought physical ETFs account for 80% of total assets in Europe. For certain asset classes, however, synthetic replication does make more sense.
SPXS is listed on the London Stock Exchange with a total expense ratio (TER) of 0.05%.