… for the banks that make them.
Synthetic ETFs may actually be the most profitable type of fund around, generating an average gross profit margin of 69% for their issuers, compared to physically replicated ETFs, that generate an average gross profit margin of 64%. Much of these profits are delivered via ancillary activities like securities lending, securities finance and swaps. The money is being made elsewhere. Outside of the view of ETF clients. Clients are in fact unwittingly providing capital for banks’ ancillary (and risky) ETF-related activities — while, incidentally, being directly connected to the risks that are being generated.
Read more here: http://ftalphaville.ft.com/blog/2011/07/11/617516/if-you-pay-peanuts-for-etfs-you-get/