lets get physical

It has been a tough day for those employed by Credit Suisse, who may wish to keep their heads down following the companys £6m FSA fine over failures in its selling of some structured products.

lets get physical


According to the Financial Times, Credit Suisse’s Asset Management division is to convert four of its swap-based ETFs into physical trackers, apparently due to client demand and mounting regulatory criticisms of the suitability of these products for retail investors.

The ETFs for conversion track Australia, Brazil, South Africa and Mexico, so this is not necessarily going to make waves the same way that, say, a S&P 500 or FTSE 100 ETF might, but the initiative can be taken as evidence of a change in priorities.

This is not to say that synthetic ETFs necessarily pose more risk than their physical cousins, nor do I wish to suggest that they don’t have an important role to play within client portfolios – they are, lest we forget, often the cheapest way to get index exposure.

However, if Credit Suisse’s investors, and by extension their intermediaries, are genuinely showing a preference for physical ETFs, it shows that understanding risk and being able to translate that to others is more of a priority than cost.

Year of debate

The debate around physical versus synthetic ETFs has really kicked off this year with the Financial Stability Board, the FSA, the Bank of England and European regulators all issuing their own papers/notes on the subject.

Whether or not there really is the possibility of an ETF failure is besides the point, so long as a wealth manager or multi-manager knows and understands exactly what they are buying. To this end, high profile voices within the fund picker community have expressed their concerns – one of these, Evercore Pan-Asset has even removed swap-based ETFs from all but its most aggressive portfolios.

“Many of the synthetic ETFs are highly complex, though I do look at how they are structured and how they are collateralised,” says Mark Harris, manager of Eden Financial’s Global Multi-Strategy Fund.

“Although some of the ETFs in physical ranges are slightly more expensive, we have tended to opt for them because you know what you are getting for your money and you gave physical rights to underlying securities.”

Growth and complexity within the ETF and structured products markets are progressing at a rapid speed, so it’s good to see that investors and the powers that be are keeping pace with the changes and the challenges ahead.


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