Physically-backed ETFs: a matter of risk

Physically-backed ETFs may initially seem more robust than their synthetic (or swap-backed) rivals. But they pose the same dangers as their derivatives-backed competitors, according to no less an authority than the UK’s Financial Stability Board (FSB). The similarities occur because almost all physically-backed products resort to a process known as securities lending, which involves lending out the stocks in an ETF portfolio in return for a small fee. “Since securities lending is a bilateral collateralised operation, it may create similar counterparty and collateral risks to synthetic E...