European Synthetic ETFs Under Fire

May 29th at 7:00am by Tom Lydon

The exchange traded fund universe has been expanding at break-neck speeds over the past couple of years, but growth among specialized synthetic ETFs, or funds that use derivatives, is losing traction in the highly saturated European markets.

Rick Genoni, global head of ETFs for Vanguard, believes that over three-fourths of synthetic ETFs in Europe are at risk of closing due to paltry asset inflows, reports Chris Flood for the Financial Times. He estimates that 76% of synthetic ETFs launched in the past three years have not met a $30 million level for long-term sustainability. [Regulatory Concerns Hamper European ETF Growth: Report]

Genoni notes that ETFs that have not accrued $30 million in assets are at “huge risk” of closure and half of all ETFs launched in Europe over the last five years are in the “danger zone.”

This mirrors a growing trend among investors who would rather hold index-based ETFs. A Edhec Risk Institute survey found that 80% of investors would rather hold physical replication ETFs that track components of an Index versus 20% of respondents that would rather trade synthetic funds comprised of derivatives.

Genoni suggests that synthetic ETFs only “have a place” in assets like commodities that can only be accessed through derivatives – commodity-based ETFs use derivatives to track the futures market.

Currently, up to 90% of European-listed ETFs are held by institutional investors, compared to the U.S. where 50% are held by institutional investors and 45% are held by advisors.

The rise of fee-based advisors has helped the proliferation of ETFs outside of institutional investing. For instance,  in the U.S., 55% of financial advisors follow fee-based commissions, whereas only 10% of advisors follow a fee-based structure in the U.K.

For more information on the ETF industry, visit our current affairs category.

Max Chen contributed to this article.

The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.

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