Invesco Powershares has repriced and remodelled two FTSE RAFI exchange traded funds (ETFs) from physical to swap-based ETFs, increasing the funds’ counterparty and collateral risk.

The Total Expense Ratio (TER) on the Powershares FTSE RAFI Emerging Markets fund has been cut from 0.85 per cent to 0.65 while the fee of the Powershares FTSE RAFI All World 3000 Fund has been cut from 0.55 per cent to 0.5 per cent.

After cutting the fees, the ETFs have moved to a swap-based operating model as opposed to directly acquiring the underlying securities of each holding.

Invesco says it has updated the prospectuses of both funds to show the additional risks that are associated with the changes.

Speaking to What Investment.co.uk, Tim Mitchell, head of specialist fund sales at Invesco Perpetual, said the changes were completed in January.

He explained, ‘We wanted to move to a swap model as we can reduce the TER of the fund. Custody is very expensive when you are covering multiple markets.’

Mitchell added that custody costs for the FTSE RAFI All World 3000 were particularly noticeable because of the wide range of regions in which the ETF invests.

Both ETFs are run using indices run on the Research Affiliates non-market cap weighted approach.