Morningstar calls for labels on synthetic ETFs

LabelsThere is a real need for common industry standards around labelling synthetic exchange-traded funds (ETFs), Morningstar has warned.

In its latest research report, entitled Morningstar ETF Research: Synthetic ETFs Under the Microscope, the data provider said the industry lacked common standards for disclosing information.

Concerns centre on funds’ asset and collateral baskets, counterparties and embedded costs.

“In Europe, it remains to be seen whether a push toward harmonisation of best practices ultimately comes from within the industry itself, or is handed down from regulators,” the report concluded.

Morningstar said in all the regions it had studied, transparency and security were top of mind for investors, providers and regulators alike.

Nevertheless, it found investor protection within ETFs is rising.

“A large majority of synthetic ETFs worldwide are subject to regulation that limits the amount of counterparty exposure to any single issuer via derivative,” it said. “Most providers offer far more protection that is mandated by local regulation.”

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