The end of IBKR + VT: a cheaper, safer, less US-dependent alternative

[ma0]

I can’t find the link anymore. But everywhere they make examples of the 90/10 portions. 90% is the collateral. If the counteparty fails, the ETF remains with 90% of the value. What happens then?
People might want to sell the etf and the provider has to sell part of that 90% to cover the costs? Maybe that 90% is losing value because the counterparty failing is probably generated by a bigger crisis?
The rule seems fine if the counterparty might fail on its own but if there something happening then the ETF value might go to 0.

A link talking partially about it.

ETF Risks in Perspective: Synthetic ETFs | Canadian Couch Potato

[nabalzbhf]

@ma0

If the counteparty fails, the ETF remains with 90% of the value. What happens then?

Unless you have a complete financial collapse they’d find another counterparty to cover.

[leman]

@gaijin

Thanks so much for this comparison. I don’t fully understand the variables that give Saxo the ‘better’ result. Is it the fees, it is the choice of ETF, is it the US withholding tax? Or a combination of all three? In other words, what would the result be for IBKR + XALL or Saxo + VT?

You can see the parameters by clicking on “Assumptions”.

@ma0

I can’t find the link anymore. But everywhere they make examples of the 90/10 portions. 90% is the collateral. If the counteparty fails, the ETF remains with 90% of the value. What happens then?
People might want to sell the etf and the provider has to sell part of that 90% to cover the costs? Maybe that 90% is losing value because the counterparty failing is probably generated by a bigger crisis?
The rule seems fine if the counterparty might fail on its own but if there something happening then the ETF value might go to 0.

A link talking partially about it.
ETF Risks in Perspective: Synthetic ETFs | Canadian Couch Potato

The article is very much obsolete, and with a Canadian focus. EU regulations changed a lot over the past 15 years. Therefore, little of it is still relevant today for UCITS funds.

I would not focus too much on the 90% because in practice, the synthetic funds tend to be overcollateralized.

[leman]

@assemblyrequired

there’s a Scalable/Xtrackers world ETF where the US and China stocks are swap-based. Doesn’t trade on SIX yet, though.

You are talking about Scalable Xtrackers MSCI All Country World UCITS ETF (LU2903252349), correct?

It is interesting indeed. I’d love to replicate ACWI accordingly. Ideally for half the price*

Region	Tracker	ISIN	TER	Replication	Exchange
USA 63%	Amundi Core S&P 500 Swap	LU1135865084	0.05%	Swap, Unfunded	Zürich
Developed ex-US 25%	UBS MSCI World ex-USA	LU2807512947	0.09%	Physical, Full replication	Zürich
Emerging 12%	BNP Paribas Easy MSCI Emerging	LU3086273813	0.09%	Swap, Unfunded	Zürich

*Blended TER = 0.058% which is below VT

[assemblyrequired]

@gaijin

I don’t fully understand the variables that give Saxo the ‘better’ result.

What do you mean by “better”, Saxo has worse performance? The difference is because of higher TER, higher buying fees, stamp tax, loss in withholding tax, and lower income tax. XALL on IBKR is ~0.2 percentage points better than on Saxo for the 20y performance difference values above.

@leman

You are talking about Scalable Xtrackers MSCI All Country World UCITS ETF (LU2903252349), correct?

Yes.

[ma0]

@leman

LU1135865084

Here: Amundi Core S&P 500 Swap UCITS ETF Acc LU1135865084 | Amundi ETF

Is the “Top 10 substitute basket” the collaterals? So instead of owning the whole basket they just have a bit (90% ?) and the rest is the “bet”?

[nabalzbhf]

Yes that’s the idea. They go ask a bank or similar “hey I have all of those can we make a deal where you give me the returns of this index, I give you the economic exposure of the collateral”.

The bank will typically hedge it so it’s risk neutral for them.

[leman]

@ma0

So instead of owning the whole basket they just have a bit (90% ?) and the rest is the “bet”?

There is no bet. The fund retains legal ownership of the collateral. The unfunded structure means that:

• Collateral is held in the ETF’s own custody account
• Investors have a direct claim on those assets
• Counterparty exposure is the difference between collateral value and index value

UCITS rules cap swap counterparty exposure at 10% of NAV but in practice most providers “reset the swap” daily, and as I said, synthetic funds tend to be overcollateralized. So real-world exposure is usually negligible.

[Eluc]

Reading thought this discussion make me realized why I was so attracted by Bitcoin in the first place. Extremely simple, transparent rules, very low (almost no) risk of rules change, no geographical impact, no direct political impact, more importantly non dependency on anyone else.

I opened a IBKR for diversification, but I’m anyway forced to have exposure to stock market with 2nd (not controlled) and 3rd pillar (controlled), now I’m wondering which additional exposure I want to add on top and which part should be risk free from all these political decisions and geopolitical wars.

Bonus, with the current low price of Bitcoin, it’s the perfect entry point to rebalance toward it. And when these new rules will be applied, I will have to decide what I do with the rest invested in US.

[gaijin]

@assemblyrequired

What do you mean by “better”, Saxo has worse performance?

You’re right. My mistake. I somehow read that Saxo had the better performance.

[Tony1337]

@leman

For a one-fund portfolio, you might consider the unfunded BNP Paribas Easy MSCI ACWI UCITS (LU3086265710) as it has no L1 drag

Only on US stocks, on ex-US potentially a disadvantage due to swap fee.

[Tony1337]

I sincerely hope you are trolling.

[nabalzbhf]

Please move the bitcoin discussion to the bitcoin thread.

[leman]

@Tony1337

Only on US stocks, on ex-US potentially a disadvantage due to swap fee.

I was under the impression that Swap costs were typically very low for major developed market indices. Tracker X500 has a TER of 4 bps, therefore Swap costs should be around 1 bps maximum, no?

I imagine they could be bigger for the emerging markets sleeve, but that’s roughly a tenth of ACWI.

[nabalzbhf]

@leman

Tracker X500 has a TER of 4 bps, therefore Swap costs should be around 1 bps maximum, no?

Afaik similar to hedging “costs”, swap “costs” (if you don’t include the transaction fees on the provider side, but were thinking of things like spread etc) are not included in the TER, it’s part of the overhead of the swap itself.

[leman]

You must be right. So we should compare the performance of (for example) Xtrackers S&P 500 Swap II UCITS and Xtrackers S&P 500 UCITS and it seems almost identical.

[nabalzbhf]

That said https://etf.dws.com/download/asset/6ee6a5b2-d799-4f7d-afa0-568c770bd08c only has example of positive spread (in favor of the fund). Either due to outperformance on withholding tax or due to the equivalent of security lending (eg it allows people on the other side of the swap to short hard to short shares).

[nabalzbhf]

Identical is bad tho, ucits sp500 physical will lose 15% of dividends, you’d expect outperforming.

[leman]

You are right. I just compared two funds tracking S&P 500 Scored & Screened Index and the synthetic one outperforms a tiny bit more.

By the way, I am pretty amazed by the profusion of funds available in Europe today. We have access to UCITS funds, including ESG-screened funds, for as low as 3 bps!