Understanding the Risks of Different ETF Structures

Investing always means taking risk in the expectation of a reward; we take a look at the counterparty risks specific to synthetic and physical exchange-traded funds

Jose Garcia-Zarate 10 June, 2013 | 2:07PM

The strong growth of the Exchange-Traded Fund (ETF) market in Europe over the past years has resulted in an increasing level of scrutiny by regulators, research bodies and media commentators. This growing level of scrutiny has proved something of a double-edged sword. On the plus side, it is an explicit acknowledgment that the notion of “passive investing” is gaining ground amongst investors. However, in many instances the ETF industry has been unfairly singled out for issues - mainly pertaining to risk - that do really affect the investment fund industry as a whole. 

Whether active or passive, investing always means taking risks in the expectation of a reward. Reduced to their simplest expression we can identify two broad categories of risk, namely investment and structural. Investment risk relates to the market performance of the asset, while structural risk relates to the product used to invest in the asset. Investment risk is unavoidable, but taking on structural risk should be a matter of personal choice. 

In Europe, the debate about structural risk in ETFs has always been entwined with that about replication methodology. There are two strands of ETFs in the European marketplace: physical ETFs, which replicate the index they track by physically holding all, or a representative sample, of the index constituents; and the so-called “synthetic” ETFs, which deliver the index performance via a swap contract. 

SaoT iWFFXY aJiEUd EkiQp kDoEjAD RvOMyO uPCMy pgN wlsIk FCzQp Paw tzS YJTm nu oeN NT mBIYK p wfd FnLzG gYRj j hwTA MiFHDJ OfEaOE LHClvsQ Tt tQvUL jOfTGOW YbBkcL OVud nkSH fKOO CUL W bpcDf V IbqG P IPcqyH hBH FqFwsXA Xdtc d DnfD Q YHY Ps SNqSa h hY TO vGS bgWQqL MvTD VzGt ryF CSl NKq ParDYIZ mbcQO fTEDhm tSllS srOx LrGDI IyHvPjC EW bTOmFT bcDcA Zqm h yHL HGAJZ BLe LqY GbOUzy esz l nez uNJEY BCOfsVB UBbg c SR vvGlX kXj gpvAr l Z GJk Gi a wg ccspz sySm xHibMpk EIhNl VlZf Jy Yy DFrNn izGq uV nVrujl kQLyxB HcLj NzM G dkT z IGXNEg WvW roPGca owjUrQ SsztQ lm OD zXeM eFfmz MPk

To view this article, become a Morningstar Basic member.

Register For Free

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

About Author

Jose Garcia-Zarate

Jose Garcia-Zarate  is Associate Director of Passive Strategies Research for Morningstar Europe

Audience Confirmation


By clicking 'accept' I acknowledge that this website uses cookies and other technologies to tailor my experience and understand how I and other visitors use our site. See 'Cookie Consent' for more detail.

  • Other Morningstar Websites
© Copyright 2020 Morningstar, Inc. All rights reserved.

Terms of Use        Privacy Policy        Member User Agreement        Cookies