UK investors reject ETFs backed by derivatives

Reject2UK investors are shunning synthetic exchange-traded funds (ETFs) in favour of funds that invest in real stocks and bonds.

Eighty-nine per cent of the 181 respondents who participated in a survey preferred the physically backed products over those that used derivatives to replicate the values of underlying securities.

Ben Johnson, director of European ETF research at Morningstar, which carried out the survey, said: “Despite the efforts made by providers of synthetic replication ETFs to improve the level of transparency and investor protection in their product lineups, respondents remain wary of swap-based ETFs.

“This is despite the ongoing conversation around counterparty risk recently shifting focus to highlight those risks arising from securities lending within physical replication ETFs.”

The survey also found that more than half of all respondents already invested via ETFs, with the remainder still familiarising themselves with the vehicles. The majority owned them in an amount less than 20% of the value of their overall portfolio.

ETF trading remained infrequent with most participants (74%) having a buy-and-hold approach.

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