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Index Replication Process


Lyxor UCITS ETFs follow both physical and synthetic index replication process.


However, most Lyxor UCITS ETFs follow synthetic replication process. This consists of entering into a derivative transaction (a ‘Performance Swap’, as defined below) with a counterparty that provides complete and effective exposure to its benchmark index. Lyxor has adopted this methodology in order to minimise tracking error, optimise transaction costs and reduce operational risks.


A Performance Swap is a contractual agreement which is negotiated over-the-counter (OTC) between two parties: the Lyxor UCITS ETF and its counterparty. From a risk perspective, each Performance Swap ranks equally with other senior unsecured obligations of the counterparty, such as common bonds (i.e., same rights to payments). In the Performance Swap, the counterparty of the Lyxor UCITS ETF commits to pay the Lyxor UCITS ETF a variable return based on a pre-determined benchmark index, instead of a fixed stream of income (as in bonds). At the same time, the counterparty will receive from the Lyxor UCITS ETF the performance and any related revenues generated by the basket's assets (excluding the value of the Performance Swap) held by the Lyxor UCITS ETF. Information provided on individual ETFs includes data on the basket relating to the ETF and the percentage value of the basket represented by each asset. The information is relevant to the closing values on the date given. 


Investment Risks


The Lyxor UCITS ETFs described on this website are not suitable for everyone. Investors' capital is at risk. Investors should not deal in this product unless they understand, having obtained independent professional advice where necessary, its nature, terms and conditions, and the extent of their exposure to risk. The value of the product can go down as well as up and can be subject to volatility due to factors such as price changes in the underlying instrument and interest rates. If a fund is quoted in a different currency to the index, currency risks exist.


Prior to any investment in any Lyxor UCITS ETF, you should make your own appraisal of the risks from a financial, legal and tax perspective, without relying exclusively on the information provided by us. We recommend that you consult your own independent professional advisors (including legal, tax, financial or accounting advisors, as appropriate).


Specific Risks


·         Capital at Risk. ETFs are tracking instruments: Their risk profile is similar to a direct investment in the Benchmark Index. Investors’ capital is fully at risk and investors may not get back the amount originally invested. Investments are not covered by the provisions of the Financial Services Compensation Scheme (“FSCS”), or any similar scheme.

·         Counterparty Risk. Investors may be exposed to risks resulting from the use of an OTC Swap with Societe Generale. Physical ETFs may have Counterparty Risk resulting from the use of a Securities Lending Programme.

·         Currency Risk. ETFs may be exposed to currency risk if the ETF or Benchmark Index holdings are denominated in a currency different to that of the Benchmark Index they are tracking. This means that exchange rate fluctuations could have a negative or positive effect on returns.

·         Replication Risk. ETFs are designed to replicate the performance of the Benchmark Index. Unexpected events relating to the constituents of the Benchmark Index may impact the Index provider’s ability to calculate the Benchmark Index, which may affect the ETF’s ability to replicate the Benchmark Index efficiently. This may create Tracking Error in the ETF.

·         Underlying Risk. The Benchmark Index of a Lyxor ETF may be complex and volatile. When investing in commodities, the Benchmark Index is calculated with reference to commodity futures contracts which can expose investors to risks related to the cost of carry and transportation. ETFs exposed to Emerging Markets carry a greater risk of potential loss than investment in Developed Markets as they are exposed to a wide range of unpredictable Emerging Market risks.

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08 May 2018

Why it could be time to add protection to your portfolio

After nigh on nine years of unnatural calm, equity markets have been much more volatile this year. Despite having dropped back substantially since February, the VIX is still nearly 50% higher than it was a year ago (as at 27 April 2018). So, has something fundamental changed and, if so, what can you do about it?

Back to the future

We expect more volatility this year than in the previous two years. This is, essentially, a long overdue return to normality after the central bank-driven suppression of recent years.

What volatitlity really looks like 


What volatility really looks like

In this analysis, realised EWMA (exponential weighted moving average) volatility is used as a proxy for volatility expectations. Source: Lyxor AM International, Robert Shiller, ThomsonReuters Eikon. Past performance is no guide to future returns

We’re now late in the expansion cycle, especially in the US where monetary tightening could soon pick up even more speed and presidential proclamations regularly provoke uncertainty. Earnings and profit margins are being watched far more intently for any sign of disappointment. Economic conditions are more changeable now the era of QE is drawing to an end. A recession some point in the mid to latter part of next year cannot be ruled out. Little wonder then that markets are, so far at least, unable to make up their mind about what comes next.

Much ado about nothing – equity (& other) returns year-to-date

chart 2

Source: Lyxor AM International, ThomsonReuters Eikon. Data from 31/12/2017 to 30/04/2018. Reported on a % change, total return, local currency basis. Past performance is no guide to future returns

Don’t go gently

As a result, they’ve swung frantically between believing the bears and raging against the dying of the light with the last of the bulls. The wariness and indecision are understandable but, for all the intensity and the scale of the ups and downs, markets haven’t actually moved very far in absolute terms and valuations are still on the rich side, especially in the US.

Putting valuations in context - price to book value vs. history 

Chart 3

Local currency index min to max values (except MSCI World, in USD). Data as at 30/04/2018, base date 31/12/1974, Monthly data. Source: Lyxor AM International, MSCI, ThomsonReuters Eikon. Past performance is no guide to future returns.

At the same time, it’s important to put things into perspective. Volatility moves in cycles so it’s normal to see it revive after such a long period in the doldrums. It could, in fact, be a perfectly rational response to greater economic and geopolitical uncertainty - part of a healthy medium-term resetting of expectations. Alternatively, the spikes of February and March could be the precursor to even greater instability.

It’s too early to say whether this newly normal regime will prompt a marked downturn in asset prices. We’re not ruling it out, especially with earnings growth estimates looking optimistic given leverage is high and bond yields are rising; but we’d first need evidence of recession or a serious inflation scare and major interest rate rises. And we’re not there yet. 

Overall, growth and corporate earnings remain strong and central banks are very unlikely to risk choking off their recoveries. Equities should still outperform so the real risk could be an early retreat into cash or, worse, bonds. Finding a way to stay invested may prove more rewarding, at least for now.

Safe havens wanted – what happened between the end

of January & the end of April? 

safe havens

Source: Lyxor IAM, ThomsonReuters Eikon. Data from 31/01/2018 to 30/04/2018. Reported on a % change, total return, local currency basis.Past performance is no guide to future returns 

Out of sight, and (wrongly) out of mind

But there’s little doubt we’re entering a period of more muted returns as well as more volatility, so protecting more of what you already have may be front of mind. There are three typical steps to portfolio protection - diversification, flexibility and the addition of alternative risk premia – but such protection doesn’t always come cheap.

Construct your portfolios differently and you can save yourself from paying over the odds. Minimum variance ETFs are designed to take the sting out of the kind of intense equity market falls we’ve seen in recent months. Their volatility is typically 15-25%* lower than traditional market-cap-based indices.  Despite that, investors have largely and, in our view, mistakenly, ignored them so far this year perhaps because of their perceived rate sensitivity – an argument that’s been given greater credence than it deserves in our view.  

*Source: Lyxor IAM, Bloomberg. Data from 30/12/2006 to 29/03/2018. Data refers to Lyxor’s FTSE Minimum Variance ETF range. Past performance is not a reliable indicator of future returns.

Unloved and underused – cumulative flows into minimum volatility ETFs since 2015

chart 5

Data as of 30/04/2018, Source: Lyxor International Asset Management. Past performance is no guide to future returns

Favour diversity

The Lyxor FTSE USA Minimum Variance UCITS ETF comes with a TER of just 0.20% (as at 01 May 2018). It’s the cheapest of its kind. But what makes it special is what you get for that cost.

Most traditional volatility reducers tend to concentrate on a relatively narrow number of predominantly large-cap stocks. But why add one risk (concentration) to replace another, especially with mid-caps and broad indices having often been less volatile than ultra-liquid large-caps over the last few years?

The FTSE strategy adheres to some of the strictest diversification targets in the industry, so you hold at least twice as many stocks as you would in any of the other similar strategies available today. It can lead to fewer specific risks, fewer valuation and crowding issues and more consistent performance.

Ready the risk reducers

Risk reduction is of course crucial. Because the strategy takes volatility, correlations and diversification targets (retaining 55-70% of original universe) into account, it tackles risk in a way few other volatility reducers can. Over the last ten years, the US index has reduced risk by around 21%. And, when the going got toughest in the early months of this year, the results were even better. It’s also less expensive than its peers and the S&P500 on most valuations metrics. If you’re nervous about what’s next, it could be the perfect solution. **

**Source: Lyxor IAM & Bloomberg, 29 March 2018  

Case study – Our minimum variance range in action earlier this year

      chart 6 - unloved

Source: Lyxor/Bloomberg. Data from 31/01/2018 to 10/04/2018. Past performance is no guide to future returns

Why choose Lyxor for portfolio protection? 

There’s no time for complacency in today’s investment markets. Whatever your goals, you need to be fully equipped for any dangers ahead. Our 50+ problem-solvers help you rise to any challenge, simply and cost-effectively. Whether you’re looking to ride rising inflation or rates, or guard against currency moves, we offer a range of unique and groundbreaking solutions.

If market volatility is your concern, you can rest assured our Minimum Variance ETFs tackle risk a little differently. And, because they are more diversified than their peers they tend to come with less rate sensitivity, which could prove crucial at a time like this. With their proven track record and TERs from just 0.20%, they may just give you the smoother ride you need.***

***Source: Lyxor International Asset Management, Bloomberg. Data from 30/12/2006 to 29/03/2018. Data refers to Lyxor’s FTSE Minimum Variance ETF range. Past performance is no guide to future returns. 

Risk Warning


All views and opinions: Lyxor & SG Cross Asset & ETF Research teams as at 3 May 2018 unless otherwise stated. Past performance is no guide to future returns.

This document is for the exclusive use of investors acting on their own account and categorized either as “Eligible Counterparties” or “Professional Clients” within the meaning of Markets in Financial Instruments Directive 2004/39/EC. These products comply with the UCITS Directive (2009/65/EC). Société Générale and Lyxor International Asset Management (LIAM) recommend that investors read carefully the “investment risks” section of the product’s documentation (prospectus and KIID). The prospectus and KIID are available free of charge on, and upon request to

The products mentioned are the object of market-making contracts, the purpose of which is to ensure the liquidity of the products on the London Stock Exchange, assuming normal market conditions and normally functioning computer systems. Units of a specific UCITS ETF managed by an asset manager and purchased on the secondary market cannot usually be sold directly back to the asset manager itself. Investors must buy and sell units 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 and may receive less than the current net asset value when selling them. Updated composition of the product’s investment portfolio is available on In addition, the indicative net asset value is published on the Reuters and Bloomberg pages of the product, and might also be mentioned on the websites of the stock exchanges where the product is listed.

Prior to investing in the product, investors should seek independent financial, tax, accounting and legal advice. It is each investor’s responsibility to ascertain that it is authorised to subscribe, or invest into this product. This document is of a commercial nature and not of a regulatory nature. This material is of a commercial nature and not a regulatory nature. This document does not constitute an offer, or an invitation to make an offer, from Société Générale, Lyxor Asset Management (together with its affiliates, Lyxor AM) or any of their respective subsidiaries to purchase or sell the product referred to herein.

Lyxor International Asset Management (LIAM), société par actions simplifiée having its registered office at Tours Société Générale, 17 cours Valmy, 92800 Puteaux (France), 418 862 215 RCS Nanterre, is authorized and regulated by the Autorité des Marchés Financiers (AMF) under the UCITS Directive (2009/65/EU) and the AIFM Directive (2011/31/EU). LIAM is represented in the UK by Lyxor Asset Management UK LLP, which is authorized and regulated by the Financial Conduct Authority in the UK under Registration Number 435658. Société Générale is a French credit institution (bank) authorised by the Autorité de contrôle prudentiel et de résolution (the French Prudential Control Authority).

Research disclaimer

Lyxor International Asset Management (“LIAM”) or its employees may have or maintain business relationships with companies covered in its research reports. As a result, investors should be aware that LIAM and its employees may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. Please see appendix at the end of this report for the analyst(s) certification(s), important disclosures and disclaimers. Alternatively, visit our global research disclosure website

Conflicts of interest 

This research contains the views, opinions and recommendations of Lyxor International Asset Management (“LIAM”) Cross Asset and ETF research analysts and/or strategists. To the extent that this research contains trade ideas based on macro views of economic market conditions or relative value, it may differ from the fundamental Cross Asset and ETF Research opinions and recommendations contained in Cross Asset and ETF Research sector or company research reports and from the views and opinions of other departments of LIAM and its affiliates. Lyxor Cross Asset and ETF research analysts and/or strategists routinely consult with LIAM sales and portfolio management personnel regarding market information including, but not limited to, pricing, spread levels and trading activity of ETFs tracking equity, fixed income and commodity indices. Trading desks may trade, or have traded, as principal on the basis of the research analyst(s) views and reports. Lyxor has mandatory research policies and procedures that are reasonably designed to (i) ensure that purported facts in research reports are based on reliable information and (ii) to prevent improper selective or tiered dissemination of research reports. In addition, research analysts receive compensation based, in part, on the quality and accuracy of their analysis, client feedback, competitive factors and LIAM’s total revenues including revenues from management fees and investment advisory fees and distribution fees.

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