S&P 500 Full vs Swap vs Active Fund

[TeraNemesis]

Please help me understand the difference between these two ETF replication Methods.

I do not know if this is discussed here or where to find a post solving my issue…

 

First is an S&P 500 which replicates full and the secound is an S&P 500 Swaper the

third would be an actively manages Fund like the ones from JPMorgan.

I know and read what a full, sampling and swap based replication means!

And swap partners and fees and swap risk of 10% and so on...

But I do not get it in my head why people recomend one over the other… or I am missing something…

 

If I invest in an full replicating S&P 500 my provider Blackrock is buying every individual of the 500 included Stocks.

But the company S&P Global has a comite which choses what stocks are actually in the S&P 500.

The weighting of these stocks is done doe to their market capitalisation. So basicly this committee is kind

of „actively managing“ the holdings oft the ETF.

 

Now: If I invest in an swap replicating S&P 500 my provider Blackrock is „actively managing“ this ETF

by buying other stocks which he sees fit to mimic the performance of the S&P 500 and swaps his portfolio

with a bank or banks in order to have a better performance and eventually evade taxation.

 

Third: If I invest in an actively managed Fund which performs or got the base of an S&P 500 my provider

JPMorgan is „actively managing“ this ETF.

 

So from my perspective as an insignificant investor is the full replicating as good or bad managed as a swaper

and is a directly active managed even worse?! Does it realy matter which committee or manager choses

how the performance of that ETF is generated?

 

Thanks

[Firobaz]

Hi @TeraNemesis,

 

Your thread poses some interesting questions. First of all, I think you have correctly outlined the three main types of funds that exist, with maybe a few inaccuracies. 

 

(1) Is the S&P committee actively managing the S&P 500 Index?

 

Answer: Not in any meaningful way. There are certain criteria they use when deciding which stocks should be included in the index. One is market cap. Another one is a certain number of profitable quarters. In 2020, for instance, Tesla wasn't part of the S&P 500 although it already was one of the largest stocks by market cap. It only became part of the index later that year when they had the requisite number of profitable quarters. Even when that criterion was fulfilled, the committe didn't add Tesla immediately to the index. So they do have some discretion. But Tesla is just one stock and only a few dozen stocks leave and enter the index in any year. Most of these decisions are made strictly based on the quantitative and verifiable criteria the committee uses. So, yes, one might say there is a management element to it, but that's so small it's not significant for performance by any standard. S&P 500 ETFs should not be regarded as managed funds.

 

(2) Does the asset management company (Blackrock) "manage" the reference portfolio of a swap-based ETF?

 

Yes, but that has no bearing on the fund performance you receive. They invest the money in a portfolio that mimics the performance of the S&P or in a portfolio they think might perform better in order to make money from the swap agreement. For instance, the LU0290358497 is a swap ETF that pays the €str overnight rate, but has a portfolio that has many longer-maturity government bonds. They take an additional risk, pay you the €str and if their bet was right, they pocket the additional returns from the reference portfolio. It worked well since 2023. So a swap-based S&P500 ETF shouldn't be seen as a managed fund either. It tracks the index via the swap agreement. What the asset manager does with the reference portfolio shouldn't be of any concern to you unless they are buying crazy stuff which no large and reputable company will do for their S&P500 ETFs which often are flagship funds. 

 

A positive of a swap-based fund vs. the full replication model is lower fees because they don't have transaction costs. For iShares' S&P500 ETFs, the difference is 0.02% annual fee at the moment. This will only matter significantly for very large sums of invested money and for a very long-term investor. A negative is a theoretical risk of losses if the swap provider goes bust. Some here think this risk is significant, I am among those who think it's negligible for the cascade of unlikely events that needs to happen for any losses to occur is a quite unlikely one: 

On 11/3/2024 at 4:14 PM, Firobaz said:

Verluste treten allerdings nur ein, wenn kumulativ folgende Ereignisse auftreten:
1. Der Swap Partner (renommierte Banken, teils mehrere) fällt aus

2. Es gibt keinen staatlichen Bailout des Swap Partners (ein neues Lehman Event wird zugelassen)

3. Der Fondsanbieter hat dies nicht kommen sehen und den Swap Partner nicht rechtzeitig gewechselt

4. Das Referenzportfolio hat seit der letzten Swap-Transation Verluste gemacht

5. Es gibt keinen staatlichen Bailout des Fonds, um Anlegervertrauen zu bewahren 

6. Der Fondsanbieter gleicht die Verluste nicht aus, um Reputationsverlust/Kapitalflucht zu verhindern

7. Die Bankenverbände gleichen die Verluste nicht aus, um Vertrauen in Anlageprodukte zu schützen (wie etwa bei Lebensversicherungen passiert)

 

Nur wenn Ereignisse 1-7 kumulativ eintreten, hat man Verluste und dann auch nur in Höhe der tatsächlichen Verluste des Referenzportfolios seit der letzten Swap-Transaktion und maximal 10% (gesetzliches Limit für Swap Verluste des Referenzportfolios). 

 

Gerade bei großen synthetischen Fonds von renommierten Kapitalanlagegesellschaften ist doch äußerst unwahrscheinlich, dass diese Kaskade eintritt, und selbst wenn ist der Verlust auf 10% gedeckelt. 

(3) Are managed funds even worse?

Yes, in my view. There is a broad consensus in financial research and economic science that fund managers only rarely beat their index. Usually the managed funds performs worse than the index and there are high fees on top of that. For many funds, you have to pay up to 5% fee upfront when buying the fund for the first time. While this can be a psychological incentive to stay in the market and not trade frequently, which is usually seen as hurting retail investor performance, I don't that's a valid reason to invest in a managed fund. In fact, I see no reason at all to do so, but of course, as always, there are a variety of opinions on that. 

 

(4)  Does it realy matter which committee or manager choses how the performance of that ETF is generated?

 

For the S&P500 ETFs, it doesn't. Neither the swap-based nor the full-replicating fund should be seen as managed funds. For real managed funds that pick their stocks from the S&P 500 in the hope of achieving a higher performance, it probably does matter who manages the fund. There are some funds that relatively reliably perform close to their benchmark, but only a few fund managers regularly beat their index and it's unclear if that was in fact skillful investing or if they were just lucky. If enough people are trying (there are a lot of fund managers out there), the probability is high that some will be lucky for 10 or 15 or 20 years in a row. Warren Buffet often beat the S&P 500 in the past. Some say it was savvy investing, others think he was just lucky (e.g., by taking high risks after going into airlines and bank stocks after the financial crisis 2008 and by investing in Apple early on. Without this one stock, his portfolio returns would suck). If Buffet is such a genius, why did he sell his airline stocks in the trough during the summer of 2020? Why did he correctly pick Apple, but not Tesla or NVIDIA? One might argue that his outperformance is mainly due to a few investment decisions, which might well just have been luck or coincidence. 

[TeraNemesis]

Thanks for your post.

But if I directly compare on justetf it would show me the net total return, does it not?
So comparing these tree ETF Types I would just choose a ETF by its return and thats it?