European Investors Drain Cash from Synthetic ETFs | ETF Trends

Investors are pulling money from “synthetic” exchange traded funds listed in Europe that hold derivatives as the products draw more attention from regulators.

ETFs that use derivatives saw the highest outflows in at least two years as investors move record amounts into ETFs backed by physical bonds and shares, Bloomberg reported Tuesday.

Nearly $3 billion of net outflows were seen by the five largest providers of synthetic ETFs in the third quarter as Societe Generale’s Lyxor Asset Management experienced the highest withdrawal, according to the report. About $1.7 billion exited the first through the third week of October.

European regulators have been taking a closer look at synthetic ETFs due to concerns investors may not fully understand how the complex financial products work. [Greater Scrutiny]

“It’s an issue of counterparty risk related to the financial health of the backing bank,” said Jose Garcia Zarate, an ETF analyst at Morningstar, in the Bloomberg story.“Fears over synthetic replication have been building up, and at the same time, fears of banks’ peripheral-debt exposure have grown.”

“The outflows are only linked to asset-allocation decisions and not to any CDS spreads,” and have “nothing” to do with the company’s synthetic-replication technique, couuntered Simon Klein, Lyxor’s head of ETFs for Europe, in the report.

Efforts in Europe to provide a clear classification system for exchange traded funds and their risks are a sensitive issue with ETF providers, and may be sowing more confusion. [European ETF Transparency Push Raises Questions]

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.