The simple objective of a passive Exchange Traded Fund (ETF) is to deliver, on a consistent basis, the performance of an index. Discover the ways in which ETFs can replicate an index and when swap-based ETFs might provide a structural advantage.
Market leading expertise in managing swap-based ETFs1
Including the largest swap-based ETF in the world.
Offering a range of regional exposures.
There are two ways an ETF can replicate the performance of an index, either through physical or swap-based replication. Depending on the particular index being tracked, one method might have advantages over the other.
Physical replication
The ETF tracks the index by buying and holding a portfolio of securities that closely matches the index’s composition. When the index rebalances, the ETF will need to buy or sell securities so that it continues to resemble it. There are two ways a physical ETF may invest:
Swap-based replication
The ETF also buys and holds a basket of securities but not necessarily those of the index being tracked. The ETF will aim to deliver the index performance through a financial agreement (swap contract) provided by an investment bank (counterparty).
Swap-based ETFs aim to deliver precise tracking, as the swap counterparty is contractually obliged to match index performance, helping keep costs low and predictable. They also benefit from favourable tax treatment in the US and UK, potentially offering a performance edge over physically replicating ETFs. Some investors prefer swap-based ETFs for precise market targeting.
While there's no definitive right or wrong way to replicate an index, the choice often depends on the index itself. In some cases, swap-based ETFs might be the most efficient way to access a particular market.
Even though the securities are different from those in the index, they’ll still be expected to generate a return. Of course, on any given day, the return could be more or less than the index return.
Swap-based ETFs contract with one or more banks to exchange the performance of their basket for the performance of the index (plus or minus a fee) using what’s known as a ‘swap contract’. This contractual agreement means that the swap-based approach is likely to be able to track an index more closely than a physical approach.
Discover more about why structure matters when choosing an ETF.
Every investment comes with risk. The primary risks of an ETF are related to the underlying market being tracked, whether the ETF is tracking an index through physical or swap-based replication methods. Having a counterparty involved, however, presents an additional risk. Counterparty risk means there is always a chance, however remote, that a counterparty fails. But ETF providers like us have long found ways to mitigate this risk successfully.
We use multiple banks to back up our swap-based ETFs and we ensure they are all in good financial health. And, when you’re talking about banks as big as JP Morgan
Combining the expertise behind our equal weight strategies with our market leading swap-based model, our new Invesco S&P 500 Equal Weight Swap UCITS ETF is the first on the market to offer swap-based exposure to the S&P 500 Equal Weight Index. This new ETF allocates the same weight to each stock in the S&P 500 index, regardless of the company's size, whilst offering the structural performance advantages of a US exposed swap-based ETF1. Read our article below to see how our ETF can provide a more balanced approach to the US equity market.
An investment in this ETF is an acquisition of units in a passively managed, index tracking fund rather than in the underlying assets owned by the ETF. Investment Risks – please click here to view more. For complete information on risks, refer to the legal documents. Value fluctuation, Use of derivatives for index tracking, Equity, Synthetic ETF Risk and Country Concentration Risk.
Please view the product information below in conjunction with the investment risks.
For ETFs domiciled in Europe, there’s an advantage for using swap-based ETFs to replicate the performance of certain major US equity indices, such as the S&P 500 index.
US tax legislation currently allows European-domiciled ETFs using swap contracts to replicate the return of these indices to avoid paying what’s known as ‘withholding tax’ (WHT) on any dividends they receive from the companies in the index. Physical ETFs are subject to a 15-30% tax rate on dividends paid by companies in the same index. As a result of this differing tax treatment, a swap-based ETF tracking certain key US equity indices have a structural advantage allowing them to outperform a physical ETF tracking the same index.
MSCI USA
MSCI World
S&P 500
S&P 500 ESG
S&P SmallCap 600
S&P 500 Equal Weight Swap
Nasdaq-100 Swap
In the case of UK and European equities, physical ETFs are required to pay stamp duty taxes on the purchase of securities from certain countries within the fund. With swap-based ETFs they don’t hold these securities that are subject to stamp duty, and instead get exposure to the index through swap contracts. This structural advantage means swap-based ETFs still aim to deliver the return of the underlying index, with no added stamp duty impact.
FTSE 100
FTSE 250
Euro STOXX 50
MSCI Europe
STOXX Europe 600
MSCI Europe ex-UK
The China A-Shares market is another case where swap-based replication can provide an advantage. Rather than the benefit coming from any tax treatment, it is due to the unusual dynamics of the market itself. Find out more in ‘Why structure matters when choosing an ETF’.
With over a decade’s expertise in managing swap-based ETFs, offering the world’s largest product in this space, the Invesco S&P 500 UCITS ETF.1
We provide full transparency around fund holdings, swap counterparties and counterparty risk.
We have prioritised risk management since we pioneered the first multi-counterparty swap-based ETFs in 2009.
Does swap-based replication offer an advantage?
Any debate over whether physical or synthetic replication is the best way to track an index has been all but laid to rest, with both methods now appreciated for their potential benefits. Discover more.
Invesco’s swap-based ETFs use an agreement/contract where two parties agree to exchange cashflows. Invesco’s synthetic ETFs use total returns swaps, where the ETF exchanges the total return on its portfolio of assets for the total return of the relevant index.
The swap fee is the all-in amount paid by the fund to the counterparty for the service of replicating the index return.
An ETF and its swap counterparty are required to ‘reset’ the swap agreement - and settle the difference – if the value owed to either party exceeds a specified amount.
A bank that enters into a swap contract with the ETF.
The possibility that the bank (swap counterparty) is unable to honour its agreement to pay the index performance to the ETF.
We accept only quality securities in the basket
We choose what securities are accepted into the fund basket and what is deemed unsuitable. You can find the basket of securities for each fund, on the product pages of our website.
We reset the swaps frequently
Our ETF and its swap counterparty are required to ‘reset’ the swap agreement – and settle the difference – if the value owed to either party exceeds a specified amount. We endeavour to reset the swaps within tight trigger values; a policy designed to further limit the amount any swap counterparty can owe the ETF.
We regularly assess and monitor swap counterparties
We apply strict financial assessment criteria when considering any counterparty and continually check each chosen counterparty to ensure it remains in a healthy financial position to meet its obligations.
We use multiple counterparties
An ETF provider can choose only one or a range of counterparties to provide swaps for its ETFs. We use multiple counterparties as it helps diversify the risk of being over-reliant on a single bank and should reduce the financial impact if one on those counterparties is unable to fulfil its obligations.
Most of the fund value is in the fund basket
Our swap-based ETF owns a basket of equities which accounts for the vast majority of the fund value. The only time that the fund has exposure to the swap counterparty is if the index being tracked performs better than the basket held by the fund.
Securities Lending is a well-established practice involving the short-term transfer (loan) of securities, for either a defined or open-ended time period.
1 Invesco, as at 31 December 2024 – Invesco S&P 500 UCITS ETF
For complete information on risks, refer to the legal documents.
Value fluctuation: The value of investments, and any income from them, will fluctuate. This may partly be the result of changes in exchange rates. Investors may not get back the full amount invested.
Use of derivatives for index tracking: The Fund’s ability to track the benchmark’s performance is reliant on the counterparties to continuously deliver the performance of the benchmark in line with the swap agreements and would also be affected by any spread between the pricing of the swaps and the pricing of the benchmark. The insolvency of any institutions providing services such as safekeeping of assets or acting as counterparty to derivatives or other instruments, may expose the Fund to financial loss.
Synthetic risk: The fund might purchase securities that are not contained in the reference index and will enter into swap agreements to exchange the performance of those securities for the performance of the reference index.
Concentration risk: The Fund might be concentrated in a specific region or sector or be exposed to a limited number of positions, which might result in greater fluctuations in the value of the Fund than for a fund that is more diversified.
Equity: The value of equities and equity-related securities can be affected by a number of factors including the activities and results of the issuer and general and regional economic and market conditions. This may result in fluctuations in the value of the Fund.
Invesco EQQQ Nasdaq 100 UCITS ETF only
Securities lending: The Fund may be exposed to the risk of the borrower defaulting on its obligation to return the securities at the end of the loan period and of being unable to sell the collateral provided to it if the borrower defaults.
Invesco MSCI World UCITS ETF, Invesco S&P China A 300 Swap UCITS ETF & Invesco S&P China A MidCap 500 Swap UCITS ETF only
Currency: The Fund’s performance may be adversely affected by variations in the exchange rates between the base currency of the Fund and the currencies to which the Fund is exposed.
Invesco S&P 500 UCITS ETF only
Currency hedging: Currency hedging between the base currency of the Fund and the currency of the share class may not completely eliminate the currency risk between those two currencies and may affect the performance of the share class
Invesco S&P 500 ESG UCITS ETF only
Environmental, social and governance: The Fund intends to invest in securities of issuers that manage their ESG exposures better relative to their peers. This may affect the Fund’s exposure to certain issuers and cause the Fund to forego certain investment opportunities. The Fund may perform differently to other funds, including underperforming other funds that do not seek to invest in securities of issuers based on their ESG ratings.
Invesco S&P 500 Equal Weight Swap UCITS ETF
Country Concentration Risk: The Fund is invested in a particular geographical region, which might result in greater fluctuations in the value of the Fund than for a fund with a broader geographical investment mandate.
Invesco S&P SmallCap 600 UCITS ETF and Invesco FTSE 250 UCITS ETF only
Small companies: As this fund invests primarily in small-sized companies, investors should be prepared to accept a higher degree of risk than for an ETF with a broader investment mandate.
Invesco EQQQ NASDAQ-100 UCITS ETF, Invesco S&P 500 UCITS ETF , Invesco S&P 500 ESG UCITS ETF only
Currency hedging: Currency hedging between the base currency of the Fund and the currency of the share class may not completely eliminate the currency risk between those two currencies and may affect the performance of the share class
For Invesco S&P China A 300 Swap UCITS ETF & Invesco S&P China A MidCap 500 Swap UCITS ETF only:
Emerging markets: As a large portion of this fund is invested in less developed countries, investors should be prepared to accept a higher degree of risk than for an ETF that invests only in developed markets.
Data as at 31 December 2024, unless otherwise stated.
By accepting this material, you consent to communicate with us in English, unless you inform us otherwise.
Costs may increase or decrease as result of currency and exchange rate fluctuations. Consult the legal documents for further information on costs. An investment in the fund is an acquisition of units in a passively managed, index tracking fund rather than in the underlying assets owned by the fund
For information on our funds and the relevant risks, refer to the Key Information Documents/Key Investor Information Documents (local languages) and Prospectus (English, French, German), and the financial reports, available from www.invesco.eu. A summary of investor rights is available in English from www.invescomanagementcompany.ie. The management company may terminate marketing arrangements.
This is marketing material and not financial advice. It is not intended as a recommendation to buy or sell any particular asset class, security or strategy. Regulatory requirements that require impartiality of investment/investment strategy recommendations are therefore not applicable nor are any prohibitions to trade before publication.
Views and opinions are based on current market conditions and are subject to change.
UCITS ETF’s units / shares purchased on the secondary market cannot usually be sold directly back to UCITS ETF. Investors must buy and sell units / shares on a secondary market with the assistance of an intermediary (e.g. a stockbroker) and may incur fees for doing so. In addition, investors may pay more than the current net asset value when buying units / shares and may receive less than the current net asset value when selling them.
For the full objectives and investment policy please consult the current prospectus.
Italy: The publication of the supplement in Italy does not imply any judgment by CONSOB on an investment in a product. The list of products listed in Italy, and the offering documents for and the supplement of each product are available: (i) at etf.invesco.com (along with the audited annual report and the unaudited half-year reports); and (ii) on the website of the Italian Stock Exchange borsaitaliana.it.
Switzerland: The representative and paying agent in Switzerland is BNP PARIBAS, Paris, Zurich Branch, Selnaustrasse 16 8002 Zürich. The Prospectus, Key Information Document, and financial reports may be obtained free of charge from the Representative. The ETFs are domiciled in Ireland.
EMEA4128974/2024
