18/05/2012
Morningstar awards clean bill of health to synthetic ETFs
In an update to an international study of ETFs (“Synthetic ETFs Under the Microscope: A Global Study,”) Morningstar claims that the degree of protection for investors is improving. A large majority of synthetic ETFs worldwide are subject to regulations which limit counterparty risks. Most providers manage their funds in a way that offers far higher protection than required by local regulations. In general, synthetic ETFs have better total expense ratios (TER) than traditional ETF funds, with the notable exception of a few Asian ETFs, and better tracking errors, which measure risks. This is particularly true of ETFS whose underlying asset classes are more limited and/or less liquid, such as emerging markets equities, for example. However, in all regions studies, transparency and security represent a priority, both in the eyes of investors, providers and regulators. From this point of view, and despite warnings from numerous regulators, common standards are still sorely missing in the classification of synthetic ETFs, transparency and collateral held, counterparties and costs. In some cases, particularly in Hong Kong, regulators have taken steps in this direction. Elsewhere, such as in Europe, the question has not yet been raised: it remains to be seen, therefore, where regulators will initiate the process which will move towards more harmonisation and better practices.
