Investors prefer physical ETFs and cite cost as very important

May 2nd, 2012 | By | Category: ETF and Index News

Morningstar, a provider of fund data and research, has released the results of its fourth online survey of UK investors into the appetite, understanding and use of ETFs. The results suggest that investors, particularly individual private investors, have a strong and continuing preference for physically-backed ETFs.

Investors prefer physical ETFs and cite cost as very important

According to the survey, nearly every investor cited ETF cost as being either “very important” or “important”.

The preference for physical over synthetic (swap-based) ETFs, a trend which has broadly been reflected in recent ETF flows, comes despite efforts by leading swap-based ETF providers, such as Deutsche Bank, Lyxor and Amundi, to placate investor concerns by improving transparency.

Another key finding of the survey – that nearly every investor cites cost as being either “very important” or “important” – suggests that recent moves by some US ETF providers to trim expense ratios will prove a successful strategy in the race to accumulate assets under management.

Indeed, in the US a ‘price war’ among ETF providers seems to have broken out, with Vanguard, SSgA, Schwab and others all competing aggressively, one way or another, on price. While such a trend has not yet been seen in Europe, recent new product launches, such as SSgA’s Europe-domicled SPDR S&P 500 ETF, have been priced to win market share.

Summary of findings:

  • More than half of all respondents already invest via ETFs, with the remainder still familiarising themselves with these vehicles;
  • 89% of survey participants prefer physically-replicated funds over synthetic-replication funds;
  • Of respondents who currently invest in ETFs, the majority own them in an amount less than 20% of the value of their overall portfolio;
  • ETF trading remains infrequent with most participants (74%) having a buy-and-hold approach;
  • The low costs of ETFs continues to resonate, with 89% of current ETF investors and 96% of prospective users citing ETFs’ low costs as being either a “very important” or “important” attribute;
  • A majority of both current and prospective users attribute some level of importance to other key ETF attributes including intraday liquidity, their stable/passive portfolios, and the fact that they facilitate access to alternative asset classes.

Commenting on the results, Ben Johnson, Morningstar’s director of European ETF research, said: “Despite the efforts made by providers of synthetic replication ETFs to improve the level of transparency and investor protection in their product lineups, respondents remain wary of swap-based ETFs. This is despite the ongoing conversation around counterparty risk recently shifting focus to highlight those risks arising from securities lending within physical replication ETFs.

“Clearly, despite the many benefits around low cost and ease of tradability, there is still some way to go in providing investors will all the information and transparency they need to feel comfortable with ETFs as a larger component in their portfolio.”

181 investors participated in the survey.

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