Some new research from Skandia has found that many financial advisers have little or no understanding of the structure of Exchange Traded Funds (ETFs).
Over two-thirds indicated they have little or no understanding of the structure of synthetic ETFs and over half have little or no understanding of asset based ETFs.
ETFs are becoming increasingly popular investment options within portfolios.
They offer investors a low cost passive investment option, although their different structures can introduce various levels of risk and complexity into a portfolio.
The research from Skandia suggests that there might be circumstances where ETFs are being used incorrectly. It also suggests that many advisers could be avoiding ETFs when they offer the most suitable solution.
With ETFs able to play an important role in a portfolio, replicating index or asset classes returns and bringing down overall management costs, they should be carefully considered when making investment decisions.
The additional risks involved in selecting ETFs with synthetic replication strategies are often difficult to quantify, so for the sake of a slight improvement in tracking error it is usually best to stick with full physical replication.
We are always very cautious when it comes to counterparty risk; the cost savings and tracking error improvements that would need to be delivered in order to recommend a synthetic ETF to our clients would need to be significant, which in most cases they are not.
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