Investors still wary on synthetic ETFs

Three-quarters of investors prefer to use physical ETFs and only 8% would use swap-based funds as their first choice, according to Morningstar.

A survey by the firm of over 800 professionals and individuals shows 82% of respondents expressed concern about counterparty risk in ETFs, suggesting swap-based providers have failed to convince investors of the safety of their methodology

Roughly the same proportion of investors judged the distinction between synthetic and physical replication as very or somewhat important.

Among those investors who are unsure whether they will invest in ETFs in the future, 33% of professional and 23% of individual investors say they are concerned about the risks of synthetic funds.

The onus for continued education lies equally with physical and synthetic providers though. Both professional and individual investors who remain uncertain on ETFs point to a need to learn more about the products as the primary reason for their hesitancy.

Morningstar says the number of investors citing a lack of knowledge has dropped since it conducted a similar survey in September 2010, but argues that the need for further education "remains apparent".

Across both current and prospective investors, low costs remain the primary attraction of ETFs. 31% of those who already trade ETFs describe intraday liquidity as very important, compared to just 19% of those who have no experience with the products, suggesting this characteristic may only be appreciated once used.

Aside from continued anxiety over synthetic replication, Morningstar's survey reveals investors at ease elsewhere.

Three-quarters of both professional and individual investors say they would consider investing in an ETF listed outside the London Stock Exchange, and the majority of both groupings appear comfortable with ETFs trading in either sterling, US dollar or the euro.