Invesco reports synthetic ETFs performed well during Covid-19 market volatility


Invesco has analysed performance and market flows related to the S&P 500, MSCI USA and MSCI World Indices and found that synthetic ETFs offering exposure to core US and global equity benchmarks have delivered strong outperformance with lower tracking errors compared to physical ETFs across the past year.

The firm writes that this period captures two contrasting market conditions, covering both the sharp equity market sell-off during March and April, which was the height of the Covid-19 crisis, as well as the subsequent rally.

The Invesco S&P 500 UCITS ETF is the largest synthetic ETF in Europe, with USD10.4 billion in AUM. It has seen the largest inflows of any competing product in Europe this year, with almost USD1 billion of additional new assets to mid-September, compared to almost USD7 billion of outflows from the rest of the S&P 500 UCITS ETF sector, the firm writes.

According to the data, Invesco’s synthetically replicated S&P 500, MSCI USA and MSCI World UCITS ETFs have each outperformed the average of their largest physical competitors by 0.24 per cent, 0.31 per cent and 0.12 per cent respectively over the 12 months to the end of August 2020. Over the past three years, these figures are 0.71 per cent, 0.64 per cent and 0.18 per cent, underscoring the long-term relative outperformance of synthetic products.

Christopher Mellor, Head of EMEA ETF Equity & Commodity Product Management at Invesco, says: “Invesco has long advocated the use of synthetic ETFs for accessing certain markets, given the inherent benefits available through these products versus physical equivalents. These benefits include the potential to generate consistent outperformance with low tracking error even in difficult market conditions.”

The low tracking error offered by synthetic products was brought into sharp focus in the crisis period, with tracking errors for physical MSCI World ETFs doubling to 0.10 per cent between 31 January and 30 April 2020. In contrast, synthetic ETFs maintained their lower volatility relative to the market throughout this period, the firm writes.

Gary Buxton, Head of EMEA ETFs and Indexed Strategies at Invesco, says: “History shows the synthetic replication method has not been without its critics, and indeed some of our competitors have either campaigned against them or converted to physical replication over the years. But we have remained committed to delivering the best results for our investors, whether through physical or synthetic replication, or indeed active management.”

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Beverly Chandler
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