UK investors remain wary of swap-based ETFs

Morningstar has released the results of its second online survey of UK investors, which reveals that lack of information is still acting as a barrier to greater participation in the market.

The survey overall concluded that while professional investors are becoming more familiar and comfortable with ETFs, there are still some key sticking points at the individual investor level.

Chief among these is the concern that not enough is known about this type of instrument. Therefore, Morningstar said, there is demand for ETF education.

“It remains apparent that the need for further education is paramount, especially amongst private investors,” the survey report stated.

“Of those individual participants who are unsure whether they will invest via ETFs, 67% responded that they would like to learn more about them before investing. While this is a noticeable decline from the 77% of individual investors who responded similarly in our first survey, it remains indicative of the need for further education.”

“Meanwhile, just 47% of professional investors who responded that they were unsure whether they would use ETFs in the future cited a desire to learn more about them before deploying them in their own or their clients’ portfolios. This compares to a figure of 67% in our prior survey, marking a substantial decline.”

One area of concern is around swap-based ETFs. A third, or 33% of the professional investors surveyed, and 23% of the individual investors expressed concern about the risks of such products and as a reason why they would be unsure of investing in ETFs in future.

“Despite a number of high-profile steps taken by providers of swap-based ETFs like Credit Suisse, db x-trackers, and iShares to improve the level of transparency and investor protection in their product lineups, respondents remain wary of swap-based ETFs.”

“Amongst survey participants, 82% expressed that they were at least somewhat concerned about counterparty risk in ETFs, whilst 74% stated a specific preference for physically-replicated funds over synthetic-replication funds.”

Other findings of the survey include:

–  Investors are still hungry for ETF education

–  Professional investors are increasingly familiar with the key points

–  Investors are showing less preference for country and sector-specific equity ETFs, with a growing interest in other varieties coming through

–  Results show little bias towards GBP-quoted ETFs; USD and Euro denominated ETFs are also popular

–  Physically-replicated funds are strongly preferred over synthetic alternatives

–  Low costs of ETFs are still an influencing factor; counterparty risks are still a major concern

–  ETFs are typically representing up to 20 per cent of current users’ portfolios

–  ETFs are the third most accessed investment type

–  ETFs are typically trading infrequently, once every few months
Specialist financial media is the most common source of ETF information

Morningstar’s director of European ETP research, Ben Johnson, said:

“There is still a great deal of hunger for information about ETFs. Individual investors are particularly in need of further assurance and information before stepping into this asset class, although signs of growing interest have emerged. Professional investors, meanwhile, are considerably more on board with the ETF concept today compared with our previous survey.”

“Broadly, therefore, interest is now a little more certain, and choices a little more varied. The increased coverage of this investment type – perhaps in the run up to a leveler playing field post the Retail Distribution Review – is gradually showing some effect.”

The survey was based on based on responses from 691 individual investors and 116 professional investors.

Full results of the survey can be found here:[asset_library_tag 2752, Morningstar ETF survey]

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Jonathan Boyd
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