Most investors spooked by synthetic ETFs

Nine out of ten investors are concerned about synthetic exchange traded funds (ETFs) on the back of a series of warnings from global regulators about their dangers, research suggests.

A Morningstar survey polling nearly 600 investors found whilst the low cost of ETFs continues to make them attractive, some 90% of investors favour the physical-backed versions amid concerns surrounding their synthetic counterparts.

"Common across all respondents is a growing and very strong preference for physical replication ETFs over their synthetic alternatives," said Morningstar director of European ETF research Ben Johnson.

"No doubt spurred on by the flurry of warnings from global regulators earlier this year, nine out of ten investors are now "somewhat" or "very concerned" about synthetic ETFs."

In July, the European Securities and Markets Authority proposed wide ranging reforms of the ETF market in Europe and said it would probe how synthetic ETFs are marketed to retail investors.

Investors are also becoming increasingly concerned about counterparty risk, according to the survey, with 90% of respondents "somewhat" or "very" concerned.

The research also points to a new bias towards GBP-quoted ETFs as interest in USD and euro-denominated funds wane.

Meanwhile, Johnson said the survey results highlight the two-speed nature of the ETF market.

"On the one hand, an existing group of power users have been deploying these vehicles in their portfolios or on behalf of their clients for some time," he said.

"On the other, a large and growing group of neophytes are hoping to gain a better understanding of the vehicle before putting it to use."

To see the Morningstar report click here