September 13, 2012 / 2:36 PM / 5 years ago

Lyxor to launch physical ETFs in derivative volte-face

* Initial range due by end-2012

* Lyxor to start with fixed-income products

By Anjuli Davies

LONDON, Sept 13 (Reuters) - Lyxor is to launch its first range of exchange-traded funds (ETFs) backed by real assets, ending its previous emphasis on products backed by derivatives, as investors increasingly opt for less complexity in the fast-expanding industry.

The third-largest ETF provider in Europe, owned by French bank Societe Generale, has been a vocal defender of synthetic products in the face of mounting criticism of their complexity by rivals.

“We want to enlarge our offer to investors,” Alain Dubois, Chairman of Lyxor Asset Management told Reuters on Thursday.

“Some prefer physical ETFs, some prefer synthetic ETFs... We want to offer the choice,” he said, adding that Lyxor will initially launch fixed income ETFs but declining to give further details.

ETFs -- funds that track baskets of shares, bonds or commodities and are traded like stocks -- have surged in popularity among investors seeking cheap access to indexes without having to buy the underlying securities.

There are two different ways in which ETFs track an underlying index. Physical replication methods take in baskets of the underlying assets tracked by the index, whereas so-called synthetic ETFs replicate the returns of an index through the use of derivatives.

In Europe, around 40 percent of ETF assets are based on synthetic products, asset manager BlackRock estimates. This compares with the United States, where assets under management for synthetic funds are low due to regulatory restrictions.

Synthetic ETFs have faced much slower growth than their physical peers in the past two years, despite continued growth in the $1.5 trillion global industry.

Lyxor, the third-largest ETF provider in Europe with 28 billion euros ($36 billion) of assets under management, has witnessed outflows of $500 million year-to-date, ETF Global Insight estimates.

Deutsche Bank, the second-largest ETF provider in Europe behind BlackRock’s iShares, also offers mostly derivatives-based products and has seen outflows of $300 million year-to-date.

Overall, investors have added just $394 million more than they have redeemed year-to-date, far less than the $13.2 billion invested in physical ETFs in Europe, data from ETF Global Insight shows.

Dubois said that Lyxor will continue to offer more products in both categories and believes the industry will grow by 15 percent this year and join rivals such as UBS who are looking to muscle in on the market with renewed efforts in recent months.

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