According to the research, most investors prefer full-replication exchange traded funds. That is, they prefer the straightforward product that does something relatively simple – tracking an index – by the most straightforward means possible – buying the underlying stocks.
But db x-trackers and Lyxor, two ETF providers that rely exclusively on synthetic replication, have found no shortage of investors, despite using derivatives, oh anathema!
A recent survey by Credit Suisse and Deloitte reinforced the notion that investors want the simpler products. 78 per cent of respondents said they would prefer ETFs with full replication methodologies. So what is going on?
According to Oliver Schupp, head of alternatives at Credit Suisse, it is a question of uninformed versus informed opinion.
“When you really take a piece of paper and write down the pros and cons [of full-replication vs synthetic], it comes down to a toss of the coin,” he says. While investors cite increased risk, namely counterparty risk, as the reason for their declared aversion to synthetic ETFs, Mr Schupp points out that many full-replication products use security lending, which has its own counterparty risk.
“The general consensus is that when you sit down with professional investors and walk them through it, they’re comfortable with swap-based ETFs.”
At the moment, Credit Suisse’s growing ETF platform only has full-replication ETFs, but it is planning to introduce swap-based products early next year, so this issue is a live one for Mr Schupp.