Interest — and retail money — in exchange traded products (ETPs) has been rising steadily over the past few years, and seems to have accelerated since the RDR. Laura Miller asks why — and what – it means for advisers and investors

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This has enabled us to convert the business from a traditional 3% upfront, 0.5% trail position with 25% recurring income in 2008, to a 1% initial and 1% ongoing fee — for advice and investment management — with 80% recurring income in 2013, he said.

Pitfalls

But what about those risks that the regulator was so keen to flag up in the past?

Bestinvest has been using a lot more ETPs in the last two years than previously, according to senior research analyst Ben Seager-Scott, but he admits there are pitfalls.

Counterparty risk is a major consideration. Swap-based ETFs almost always use derivatives with an investment bank, so exposure to that bank should be mitigated by holding collateral. Even physical ETFs can have some level of counterparty risk where the ETF engages in securities lending.

Seagar-Scott also highlights liquidity risks in certain markets.

While the ETF itself might trade very readily on the London Stock Exchange, if the underlying instruments aren’t liquid enough, this could cause serious problems for the ETF, which could start trading away from its net asset value.

Propsito financial planner Huw Jones is in the process of removing ETFs from his clients’ portfolios altogether, largely due to administration issues.

He explains: ETFs are traded like shares. This means that they can only be bought and sold in whole number multiples. That’s OK when the holdings to be sold are large enough to satisfy the stock broker minimum trade limit. But if the holding is small the trade won’t go through.

For Jones, a return to traditional funds’ with the ability to purchase and sell fractions of units has improved operational efficiency.

So ETPs aren’t for everyone. But for a growing number, their lower cost — and the greater access they can provide to some markets — make them an attractive addition to portfolios.

There are risks with ETPs but arguably these are no greater than for other investments, and they certainly do not seem to be putting investors off as the assets in them continue to swell.