Nevertheless, some areas of the financial markets are not easily accessible through “physical” or passive indexing replication. In such cases, derivatives are the only option, but investors need to be aware of the potential counterparty risks, Ebner noted. [European Regulators Impose Strict ETF Rules]
The greater regulatory focus on synthetic ETFs has brought the issue of counterparty risk to the attention of many investors, Jose Garcia Zarate, an ETF analyst at Morningstar, said. According to a recent Morningstar Survey, 90% of British respondents say they prefer physical ETFs over synthetics. [Synthetic ETFs See Outflows in Europe]
For more information on ETFs, visit our ETF 101 category.
Max Chen contributed to this article.