Blackrock launches all-country and emerging market swap ETFs
BlackRock has extended its swap-based ETF roster with the launch of all-country and emerging market equity strategies.
The iShares MSCI ACWI Swap UCITS ETF (ACSW) and the iShares MSCI EM Swap UCITS ETF (ESWP) are listed on Euronext Amsterdam with total expense ratios (TERs) of 0.12% and 0.14%, respectively.
I have the same criticism to the âno withholding taxesâ story as always. What index is been replicated? MSCI Net, my guess, one that calculates performance with 30% withholding tax for every dividend distribution. So, instead of paying 15% of US level 1 withholding tax with a IE ETF with physical holdings, you get from someone a total performance of an index with 30% withholding tax already calculated in.
Another thing is you never know how much you are going to be taxed in CH. It looks like CH taxes interest earned on actual holdings, which are mostly some European government bonds, not on the assumed yield of the replicated index. Didnât dig deeper, but these considerations are enough for me to avoid swap-based European ETFs.
Itâs the case for every ETFs tho, even physical (the IE ETFs will beat the benchmark by ~US dividend * 15% and the synthetic LU ones by 30%). I donât think itâs a reason to dismiss them.
Sure, but for a physical ETF the benchmark is just for comparison. For a synthetic one, this is indeed what you get. At least this is my understanding of how they work. Someone would have to dig deeper in their documentation.
Afaik their swap contracts have gross returns, not net (using exemption from Section 871(m)). Thatâs why they beat their benchmarks.
I have to see this 
. Where is their documentation?
But I have doubts from another prospective: one can never earn gross total return, again because of withholding taxes. So why would an institution deliver more than what they can earn? I mean, have a negative âarbitraging differenceâ.
Not sure you can find it easily. But iirc it was pretty visible in the returns vs benchmark when the new rule started taking effect.
Edit:
While the investment objective of the fund is to replicate the net total return index, the swaps entered into by the fund reference the gross total return index. The swap fee paid by the fund is relative to this gross total return index and as a result the performance of the ETF is likely to exceed the return of the net return index.
Thatâs what Section 871(m) is about, there are no withholding taxes for derivative tracking qualified indices.
The swap counterparty, usually a massive investment bank, is the one holding the physical US stocks. Thanks to a specific US tax rule (Section 871(m) of the HIRE Act), these banks can use derivatives like total return swaps to legally avoid US withholding taxes entirely. So, they are effectively pulling in the dividends at a 0% tax rate.
The bank is generating the Gross Total Return, but they are only obligated to pay the ETF the Net Total Return, which already has that 30% tax deduction baked into the benchmark. This creates a massive spread. Since the ETF market is highly competitive, the counterparty passes the bulk of those tax savings right back to the ETF via the swap contract. This is why you will often see this reported as a ânegative swap feeâ, it is basically the bank handing the tax savings back to the fund, which is exactly what gives these synthetic ETFs that tax alpha over the physical Irish ones.
Very well, thank you. I should probably look closely at synthetic ETFs on US stocks.
What about other 40+ countries in ACWI that impose withholding tax on dividends?
ICtax gives for IE00B60SX170 in 2024 and 2023 a taxable income of ca. 1.8%, which corresponds well to the dividend yield of MSCI USA index. I am really intrigued.
For the other developed and emerging markets, from France and Germany to Japan and Brazil, there is generally no equivalent âSection 871(m)â loophole.
The magic lies in Switzerlandâs tax-free capital gains. While you do pay regular Swiss income tax on the virtual dividend yield, with a synthetic ETF, the money that would usually be lost to the IRS remains in the fund, boosting its share price directly. Since capital gains are tax-free here, this additional performance is transferred directly to your account as pure, untaxed growth. In effect, you are turning a loss to the US government into tax-free capital appreciation.
Thatâs why I like the idea of scalable, a mix sounds really superior.
(They have synthetic for emerging as well, the reason is that it delivers a premium since thatâs the main way people can hedge/short Chinese stocks (maybe also India?)
Edit: in practice, the difference wonât be life changing (between TER/tracking difference/swap fees/etc), but I might prefer not giving away money to the IRS 
You probably get gross on the US return, but defnitely not on ex-US.
My general understanding is that swap based is only a real advantage on US stocks. (Maybe some other smaller countries as well, but I donât know how this is handle in an acwi swap context)
Hence me saying that the mix approach that scalable etf does seem very sensible.