Cornell_Swap_Teach_In_9-21_v1

Thematic mismatch indexetf contains or overweights

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Thematic mismatch: index/ETF contains or overweights names you don’t want (or, no ETF exists) Example: SMH Semis HOLDR. Intel (23%) + Texas Instruments (21%) + Applied Materials (14%) = 58% of the index (only 18 constituents in total) Management fees: swap financing rate may be cheaper than ETF cost Example: FXI @ 74bps per annum; MSCI China 3ML FLAT
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3 Custom XLF In September 2008, borrow costs on XLF reached levels of 3%, and approached 2.5% again in July 2009. The constituents and weightings of the ETF are rigid, meaning single names can have sizable effects on borrow rates (eg, Citigroup). DB was able to create a custom index that minimized borrow costs and tracking error to IXM (the index tracked by the XLF). The bottom line: DB’s custom IXM basket provided a 99.8% correlation to IXM for the six months of the trade with borrow fees reduced to just 40bps.
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