UK advisors are still largely all at sea when it comes to some types of exchange-traded funds, meaning that demand for such products will remain “limited” after the implementation of the Retail Distribution Review at the start of next year, according to Skandia, the UK wealth management firm which is part of Old Mutual.

Having surveyed 840 advisors, the firm found that two thirds said they had little or no understanding of how synthetic (or swaps-based) or asset-based ETFs are constructed.

This lack of knowledge seems to be translating into a reluctance to put clients into ETFs, as only 70 per cent of those surveyed said they have clients holding ETFs, and of these the vast majority have dedicated only 5 per cent or less of clients’ portfolios to these products. This does not mean that passive investments are entirely out of favour however, but rather that advisors tend to prefer other vehicles, Skandia says, although it does note that the majority of advisors (54 per cent) have 10 per cent or less of their clients' assets in passive investments. 

Skandia has added its voice to an increasing body of commentary casting doubt on whether ETFs are in fact always the transparent, low cost “magic bullet” they are touted as. Not only can tracker funds represent a cheaper passive investment solution, but they are also much easier for both advisors and clients to understand, the firm says.

While the proliferation of ETFs continues globally, the ardour of the investment world towards such products has cooled somewhat in recent times amid concerns such as swap-based vehicles representing hidden counterparty risks. Exponents hold however that exchange-traded products are a very useful tool in the advisor’s toolkit and are an efficient means of expressing a view on hard-to-access markets or asset classes.

The figures for the ETP sector speak for themselves: at end-May $1.619 trillion was held in ETPs globally, according to iShares. Fixed income ETPs in particular are set to boom, according to the firm, as last month fixed income ETPs recorded their second record month for the year with inflows of $11 billion, compared with $9.1 billion for the previous record set in January.

“If we take the $1.6 trillion that is invested in ETPs, only about 18 per cent is in fixed income assets, but fixed income markets are larger by capitalisation than the equity markets,” David Bower, iShares' head of sales for the UK and Channel Islands, recently told WealthBriefing.

“We see fixed income as the growth area for the next three to five years, across sovereign and credit including investment and sub investment grade, and across regions, both developed and emerging markets,” said Bower.