RETAIL investors are increasingly keen on exchange-traded funds (ETFs) but some professional money managers are wary, especially of those that employ exotic investment features.
Basic ETFs trade like shares but track the performance of an actual stock index or assets such as gold or bonds. They have a huge following in the investment community.
But a Deutsche Bank survey has shown that some fund managers are cagey about ETFs that use gimmicks such as derivatives or lending out share investments to enhance returns.
These managers prefer ETFs that are actively traded, even though the liquidity of the underlying markets that the ETFs track should also be taken into consideration.
Other factors they also consider include the taxes levied on dividends, the management fee charged by the ETF provider and the 'tracking error', which measures how closely the fund tracks the index.
These are among the findings the German bank uncovered when it talked to 389 institutional investors, which included fund managers, pension funds and insurance firms, between March and last month. About one-third of the respondents managed funds of US$1 billion (S$1.2 billion) or more.
Mr Marco Montanari, Asia head of db X-Trackers, Deutsche Bank's ETF unit, released the findings yesterday and noted that more than half of the respondents invest in ETFs.
He estimated that regional fund managers invest about US$70 billion to US$80 billion in Asian ETFs and US$40 billion in United States and European ETFs.
Some fund managers use ETFs as a way to get access to markets such as China and India where there are still constraints imposed on direct share investing.
Many also make use of ETFs as part of their strategy to get benchmark returns on regional indexes.
Mr Montanari noted that 35 per cent of respondents avoid buying into ETFs that make use of financial derivatives or engage in securities lending. Such information is usually disclosed in an ETF's prospectus, he added.
However, 54 per cent of respondents are comfortable with such ETF investments once the risks have been explained.
Although ETFs are traditionally made up of baskets of stocks that try to match the indexes they track as closely as possible, there are also ETFs that use financial derivatives to get 'synthetic replication' of the indexes.
A recent report by another ETF provider, BlackRock, showed that of the 81 Singapore-listed ETFs, 71 are 'synthetic' in nature, collectively holding about US$2.6 billion in assets.
Mr Montanari said Deutsche Bank had sold about $2.1 billion worth of ETFs to Asian investors over the past two years.
It has 43 ETFs listed in Singapore and 24 listed in Hong Kong. The bulk of its ETF buyers are institutional investors.
In Europe, Deutsche Bank has attracted US$50 billion in funds for ETFs under management.