The iShares MSCI Russia Capped Swap ETF tracks the MSCI Russia Capped Index, which comprises the top 85 per cent of investable Russian equities in terms of size. The iShares S&P CNX Nifty India Swap ETF tracks the S&P CNX Nifty India Index compring the biggest and most liquid Indian stocks.
The difference between these ETFs and the rest of the iShares range is their swap structure. Swaps are agreements between the ETF provider and a counterparty, usually an investment bank. They enable ETFs to track an index without physically investing in the underlying assets. iShares will do this only where physical investment is difficult. For example, there may be restrictions on foreign ownership of assets, liquidity constraints or it may not be possible to hold some assets directly under the Ucits III rules.
To reduce the risk of a counterparty not meeting its obligations under a swap, iShares will use three counterparties – BS, UBS and Creidt Suisse. Collateral risk and a lack of transparency can also be problems for some ETFs. Some swaps work through the ETF provider buying and holding a basket of stocks from a counterparty as collateral, then exchanging the performance of this basket for that of the index. Others involve cash, bonds or equities amounting to at least 90 per cent of an ETF’s net asset value being held as collateral but iShares will exceed this, or over collateralise, for extra security. iShares will also provide investors with full transparency regarding collateral holdings, swap costs and fund exposures.
Sophisticated investors who want low-cost access to Russian and Indian markets that the swap structure has made possible may welcome these funds. The iShares drive for greater transparency is also a positive but the potential drawback is that some investors may not understand all the information made available to them due to the complex nature of swap structures.