Kranefuss: All Physical Or All Synthetic Is “Nonsense”

Source chairman says ETF issuers should offer variety and its upcoming physical equity ETF range is not the be-all and end-all

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Editor, etf.com Europe
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Reviewed by: Rachael Revesz
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Edited by: Rachael Revesz

Source already offers cheap and plain vanilla exchange traded funds (ETFs) and the initiative to launch a family of physical, equity ETFs with Legal & General Investment Management (LGIM) is not a ploy to move away from synthetic funds, according to chairman Lee Kranefuss.

Speaking to ETF.com about its announced partnership with LGIM to launch a range of physically replicated equity ETFs, Kranefuss said the move is not intended to "de-emphasise" its other funds and partnerships.

“Most providers have one platform with one set of service providers, and then they can’t do certain things [certain strategies] and they try to convince you that they have made all the right choices – like they only offer synthetic because that’s what they do a lot of anyway,” said Kranefuss. “Our goal is to provide a next generation model, to provide the investment strategies people want, not just the ones we can come up with internally.”

Kranefuss added it was “nonsense” to have 100 percent in either physical or synthetic, and firms should offer a variety of strategies.

Source has 42 percent of existing assets in physical ETFs, mostly in fixed income and managed by PIMCO, but this figure also includes precious metals and China A-shares. Meanwhile 58 percent of assets are in synthetic funds – or as Source calls it, the multi-dealer swap model, thanks to its partnerships with various investment banks.

Unlike providers such as db X-trackers and Lyxor, Kranefuss said Source will not convert any synthetic funds to physical replication.

The new equity range would be managed by LGIM and Kranefuss said the proposed start date is early 2016, but it was too early to say how many ETFs would be launched.

When asked if the partnership with LGIM was the first push by Source to offer plain vanilla ETFs for financial advisers, Kranefuss responded the firm already offers this type of fund.

“Look at our Euro Stoxx and our S&P 500 ETFs. They are the lowest cost and best performing in their categories in Europe,” he said. “If people really want plain vanilla, I would strongly encourage them to look at those funds and the multi-dealer swap model. On price and performance and some other features, they are very beneficial relative to physical.”

The firm also announced that it has launched a GBP-hedged share class on its $1.2 billion PIMCO Short-Term High Yield Corporate Bond Index Source UCITS ETF, tapping into demand for currency hedged high yield exposure in the UK.

Rachael Revesz joined etf.com in August 2013 as staff writer. Previously an investment reporter at Citywire, she has a background in writing content for retail financial advisors and has covered a wide range of subjects in finance. Revesz studied journalism at PMA Media, which has since merged with the Press Association. She also holds a B.A. in modern languages from Durham University, as well as CF1 and CF2 financial planning certificates from the CII.