Morningstar UK ETF Survey November 2011

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1 Morningstar UK ETF Survey November 2011

2 UK Investors Show Strong Preference for Physical Replication ETFs The results from our third Morningstar ETF Centre survey show a further strengthening of UK investors preference for physical replication ETFs and a growing aversion to synthetic ETFs on the part of prospective investors. Our survey captured a broad range of investors that are either interested in or already investing via ETFs. Out of 593 total responses, 501 came from individual investors whilst 92 came from professional investors, mostly advisers. More than half of all respondents have already invested via ETFs, with the remainder still familiarising themselves with these new vehicles. It remains apparent that the need for further education is paramount amongst private and professional investors alike. Of those retail investors who are unsure whether they will invest via ETFs, 65 responded that they would like to learn more about them before investing. While this is a noticeable decline from the 77 of individual investors who responded similarly in our first survey released in September 2010 it remains indicative of the need for further education. Meanwhile, 64 of professional investors who responded that they were unsure whether they would use ETFs in the future cited a desire to learn more about them before deploying them in their own or their clients portfolios. This compares to a figure of 47 in our prior survey, marking a substantial uptick. If you are unsure or do not think you will invest in ETFs in the future, why? Prefer to learn more about ETFs first Professional Investor Individual Investor Prefer an active manager Concerned about risks of swap-based ETFs Concerned about costs of brokerage fees Do not plan on ever investing in ETFs 6 6 Other 0 4 2

3 Despite ongoing efforts being made by providers of synthetic replication ETFs to improve the level of transparency and investor protection in their product lineups, respondents remain wary of swap-based ETFs. Amongst survey participants, 90 expressed that they were at least somewhat concerned about counterparty risk in ETFs (up from 82 in our previous survey), whilst 90 stated a specific preference for physically-replicated funds over synthetic-replication funds (up from 74). How important is the distinction between synthetic (swap-based) and physical replication ETFs in your investment decision? e Very Important 50 e Somewhat Important 33 e Somewhat Unimportant 9 e Not at All 2 e Unfamilar 7 Are you concerned about counterparty risk in ETFs? e Very Concerned 41 e Somewhat Concerned 49 e Hardly Concerned 10 e Not at All 0 e Unaware 0 Which of the following ETF structures do you prefer? e Physical 90 e Synthetic 2 e N/A 8 What compensation would you expect for accepting slightly greater counterparty risk in an investment? (mark all that apply) Lower Expense Ratio Better Liquidity Lower Tracking Error 17 None of the Above 27 Do you believe overweighting a stock portfolio in any of the following categories can boost long-term returns? (mark all that apply) Smaller Companies Value Stocks Fast-growing Companies 17 High Price Momentum Stocks 10 3

4 While there is still a need for further education, especially as it pertains to the variety of structures employed by various providers of exchange-traded products and the pluses and minuses associated with them, the appeal of these vehicles remains clear to both current and prospective investors alike. In particular, ETF s low costs continue to resonate with investors, with 91 of current ETF investors and 93 of prospective users citing ETFs low costs as being either a very important or important attribute. How would you rank the importance of the following attributes of ETFs in your decision making process? Current Investors Prospective Investors Response # # Low Cost Very Important Important Moderately Important Little Importance Unimportant Total # of Respondents Intraday Liquidity Very Important Important Moderately Important Little Importance Unimportant Total # of Respondents Stable/Passive Portfolios Very Important Important Moderately Important Little Importance Unimportant Total # of Respondents Access to New Asset Classes Very Important Important Moderately Important Little Importance Unimportant Total # of Respondents Ability to Short Sell Very Important Important Moderately Important Little Importance Unimportant Total # of Respondents

5 Professional Investor Individual Investor Response # # Are you interested in investing via ETFs or Not Sure recommending ETFs in the future? Yes No Total # of Respondents Approximately what percentage of your Less than portfolio or assets under advisement is 5 to invested in ETFs? 20 to More than I do not manage or advise any portfolios Total # of Respondents If you hold or recommend ETFs in portfolios, Country Specific Equities what investment types are you likely Sector Specific Equities to hold as ETFs? (mark all that apply) Traditional Broad Equity Indices Other Esoteric Equity Classes Broad Fixed Income Sector Specific Fixed Income Duration Specific Fixed Income Total # of Respondents Would you consider buying or recommending Pound Sterling an ETF that trades in any of the following U.S. Dollar currencies? (mark all that apply) Euro Other G10 Currency Swiss Franc Total # of Respondents Would you consider buying or recommending Yes an ETF that is listed on an exchange Yes, if no similar ETF is listed on my local exchange other than the London Stock Exchange? No Yes, for lower trading costs or expense ratio Total # of Respondents

6 Professional Investor Response # Closest Job Description Financial Intermediary/Adviser Institutional Portfolio Manager Investment Research Other 9 10 Total # of Respondents 92 Current Level of AUM 1 billion or more million to 999 million million to 99 million Less than 10 million N/A 9 10 Total # of Respondents 92 How Do You Manage a Portfolio? Asset Allocation First and Foremost Investment Selection Shapes Asset Allocation N/A Total # of Respondents 92 Individual Investor Response # How do you manage your own I Do Not Currently Invest 17 3 portfolio investments? With The Help of an Adviser 43 9 Manage My Own Total # of Respondents 499 Size of Investment Portfolio 1 million or more , , , , , , ,000-99, Less than 50, N/A 29 6 Total # of Respondents 6

7 Other Response # What type of investor are you? Private Investor Professional Investor Total # of Respondents 593 Have You Ever Held Any ETFs in Your Yes Investment Portfolios? No/Not Sure I Do Not Currently Invest 29 5 Total # of Respondents 593 Which of the Following do You Currently Individual Stocks Invest In? (mark all that apply) Open End Funds Exchange-Traded Funds Individual Bonds Other 42 9 Structured Products/Notes 40 8 Options / Other Derivatives 12 2 Annuities 19 4 Total # of Respondents 492 How often do you expect to trade the majority Trading Throughout the Day 10 3 of your ETF holdings, whether for rebalancing or One Trade per Week 15 5 as part of a trading strategy? One Trade per Month One Trade Every Few Months to a Year Buy Once and Hold for Years No Particular Pattern Total # of Respondents 311 How important is the domicile of an Very Important UCITS-compliant ETF in your investment decision? Somewhat Important Somewhat Unimportant Not at All 19 6 Unaware of the Importance of Domicile Total # of Respondents 314 How Did You First Hear About ETFs? Newspaper / Magazine on ETFs Other Online Financial Media From Morningstar Web Site Never Heard of ETFs 20 4 From an Adviser 23 5 Friend or Colleague 29 6 Other 32 6 ETF Provider Ad 21 4 TV Story on ETFs 7 1 Total # of Respondents 498 7

8 Providers # # # # # # # # Amundi Comstage Credit Suisse ETF db x-trackers EasyETF ETFLab ETF Securities ishares Lyxor Source SPDR UBS ETF Total number of respondents was 593 Favourable Impression Favourable Impression Owned an ETF Heard of Company Heard of Company Favourable Impression Heard of Company Favourable Impression Owned an ETF Heard of Company Owned an ETF Owned and ETF Total # of Respondents Notes The Morningstar ETF Centre launched on 4th March 2010 and provides access to Morningstar data, tools, and research. The fourth ETF survey is now open and interested individuals can participate via the Morningstar ETF Centre at The Centre is also home to analyst-driven qualitative research reports on more than 200 of the largest European domiciled exchangetraded products. The Morningstar ETF Centre launched on 4th March 2010 and provides access to Morningstar data, tools, and analyst commentary on exchange-traded funds. Available ETF data includes pricing, performance returns, style box detail, fees, and portfolio composition. Visitors can also search for ETFs based on a chosen Morningstar category or preferred fund group. The Morningstar Quick Rank tool ranks ETFs by performance, and Morningstar s Instant X-Ray allows up to five ETFs to be compared side by side for performance, composition, and fees. Analyst commentary includes educational slide shows on a range of ETF-related topics, and a monthly newsletter delivers the latest analysis on ETF news directly to subscribers. In addition, Morningstar s European ETF analyst team hosts monthly webinars with professional investors and advisers; investors and members of the media are welcome to attend. For media enquiries, please contact ukmedia@morningstar.com or +44 (0) For commercial enquiries, please contact simon.hodge@morningstar.com or +44 (0)