Are Synthetic ETFs a Dying Breed?

The number of synthetic ETFs available for sale still amply surpasses the number of physical counterparts, but investors have shown a clear preference for physical replication

Jose Garcia Zarate 25 October, 2016 | 11:06AM
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Not that long ago it was hard to talk about ETFs and not get embroiled in heated discussions about the merits – or otherwise – of physical and synthetic replication. The debate was actively encouraged by ETF providers themselves. They soon realised that their infighting was detrimental for an industry in its early stages of growth, and agreed a truce. For the past few years, public confrontations about replication methodology have been largely avoided. However, the debate has had significant consequences.

There are instances where physical replication remains technically or financially unfeasible

According to Morningstar data, the split in assets under management between physical and synthetic exchange-traded-products – we include exchange-traded-commodities (ETCs) here – has shifted from 55%-45% in 2011 to just shy of 80%-20% nowadays. The number of synthetic products available for sale still amply surpasses the number of physical counterparts, but investors have shown a clear preference for physical replication.   

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About Author

Jose Garcia Zarate

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