European exchange traded fund investors were selling “synthetic” products that trade derivatives last month, shifting more assets into ETFs that track equities, bonds and commodities.
According to a BlackRock research note, derivative-based synthetic ETFs experienced net redemptions of $1.86 billion in October, whereas physically-backed passive index funds garnered $3.11 billion, reports Christopher Condon for Bloomberg. [European Investors Drain Cash from Synthetic ETFs]
European investors took $608 million from synthetic ETFs that track broad European equities in October while investing $779 million into passive European stock index-based ETFs. Additionally, synthetic gold ETFs leaked $2.2 million, whereas physically-backed gold ETFs added $1.2 billion.
Synthetic funds are under greater scrutiny due to greater concerns that investors may not fully understand the risks and how the complex financial instruments work. [Complex European ETFs Face Scrutiny from Regulators]
The Financial Times recently reported investment banks can save on funding costs by running synthetic ETFs that use derivatives to follow benchmarks. “The savings come through using cash from ETF investors to fund illiquid assets banks have to hold as part of their market-making functions,” FT reported.