Research finds investors prefer physical ETFs

Investors are showing a strong preference for physical exchange traded funds (ETFs), a survey by data provider Morningstar has shown.

The report, which covered 181 investors, found 89% of those surveyed preferred the investment vehicle over synthetic versions of the product.

However, the FSA has recently issued warnings about both in a fact sheet for investment advisers on exchange traded products (ETPs).

The term ETP covers all exchange traded products, the majority of which are exchange traded funds but also includes notes and commodities.

Physical ETPs buy and hold shares in the index it is tracking, whereas synthetic ETPs use swaps to reflect the value.

In its factsheet, the FSA warned that both structures could provide “high levels” of collateral risk.

It acknowledged that the retail market is small but expected to grow, something reflected in the survey by Morningstar.

More than half of the respondents already used ETFs, with the rest familiarising themselves with them.

Despite their rise in popularity, however, the research showed they are not necessarily being used as some proponents may expect.

Investors are holding on to ETFs rather than utilising their often cited ‘liquid’ characteristic, according to the survey, with 74% adopting a buy-and-hold approach rather than frequently selling the vehicles.

Low cost proved to be an important factor, with 96% saying it was an “important” or “very important” attribute.

But ETFs have not made a huge footprint on portfolios, according to the data, as the majority reported holdings of below 20%.