Influence of the growing ETF industry on active investor relations work 29Fundamentals of passive investments and ETFs performance deviations between the ETF and its underlying index occur Partial replications also referred as approximate replication methods is of little importance in practice in the ETF market Krautbauer 2015 p 52 Synthetic replication Funds being replicated synthetically trade intr aday on an exchange like physically replicated funds Stevenson and Tuckwell 2019 p 11 but use derivates e g swaps to replicate a certain index Krautbauer 2015 p 52 In a swap agree ment two parties usually the ETF provider and an investment bank enter a contract in which both agree on a delivery of performance The ETF party agrees to hand over the performance of the collat eral basket of shares to the bank or another swap partner and in exchange receives the performance of the index Heinrich Jänner 2018 p 355 In addi tion the bank pays yields and dividend payments to the ETF issuer Those payments are offset by the payment of swap fees and yields of the basket of shares to the bank Swap ETFs can be divided into two types unfunded which is more common and funded Stevenson and Tuckwell 2019 p 13 In an unfunded swap ETF the collateral basket or shares is held by the ETF issuer itself which is why only the ETF pro vider and the swap partner are involved in the swap process Payment flows directly between the two Krautbauer 2015 p 62 In contrast in a funded swap the swap partner takes care of the collateral which is deposited with an independent trustee and held on behalf of the ETF provider Heinrich Jänner 2018 p 356 As a consequence the swap counterparty usually an investment bank receives cash instead of the collateral bas ket and exchanges this cash itself for the basket Stevenson and Tuckwell 2019 p 14 Large sized indices can be replicated more pre cisely than with a physical partial replication ETF issuers provide more exposure to specific markets which are difficult to access Furthermore the fee structure is lower compared to a full replication because less shares have to be acquired and trad ing at lower spreads is possible Additionally costs for rebalancing the composition of the portfolio due to changes in the benchmark do not occur as the ETF provider does not trade the shares of the underlying index Stevenson and Tuckwell 2019 p 11 The probability of occurring tracking errors is below the one of physical replication since the performance of the ETF is assured by contract Beside the disadvantage of high complexity which makes a tracking not possible a counter party risk exists Default of the swap partner can lead to a decrease in price and as a result losses for investors Heinrich Jänner 2018 p 357 How ever issuers of fully replicating ETFs often engage in securities lending They lend the securities they have acquired to short sellers to generate addi tional income By lending those securities a coun terparty risk also occurs by physical replications Stevenson and Tuckwell 2019 p 11 Deutsche Börse 2018 p 15 Short sellers influence or even exploit the prices in the market Boyde 2020b Although still widespread in Europe and Asia syn thetic replications are losing importance over the last years and the market share will continue to further decline in the future Whereas nearly 60 of ETFs in Europe were replicated synthetically in 2011 the percentage steadily decreased over the years down to nearly 20 in 2017 Stevenson and Tuckwell 2019 p 13 Some institutional investors are not even allowed to purchase swap based ETFs especially in the US Deutsche Börse 2018 p 15 2 2 4 2 Creation redemption process ETF holdings can be increased or decreased depending on current demand with the cre ation redemption process The process flow of the creation redemption process is shown in figure 5 on page 24 In contrast to investment funds this process has no impact on other investors in the fund It even has a positive influence for all inves

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