Eighty percent of financial advisers concerned about ETFs

AdvisorResearch by Skandia UK has revealed that 80% of financial advisers who were aware of a report on exchange-traded funds (ETFs) by the Financial Stability Board share its concerns regarding the risks and complexities of these products.

A particular issue is the use of synthetic ETFs, comprised of asset swaps instead of physical assets. With the swap counterparty often being a bank, this creates exposure if the bank defaults and also poses financial system risks.

There are additional concerns that banks are using ETFs as a source of funding.

Apart from the FSB, concerns have also been expressed by the Financial Policy Committee, Bank of England, Financial Services Authority and, reportedly, the Serious Fraud Office.

In Skandia’s Adviser Confidence Barometer Survey of 1,300 advisers during the second quarter, 46% responded that they have not used ETFs for any clients and 75% of those who had, said that they used them for less than 10% of their clients.

Graham Bentley, Skandia’s investment expert, said: “Given the rapid growth in ETFs and the counterparty risk involved, it is not surprising that the regulatory bodies are heavily scrutinising the ETF market.”

He added: “The Regulator will also be focused on preventing another miss-selling scandal and seems to be stepping in early to ensure all the product risks are clearly defined.”

©2011 funds europe