Synthetic ETF Definition
Learn the definition of synthetic etf and other ETF terminology from the etf.com glossary.
Learn more about Synthetic ETF
A Synthetic ETF employs derivative instruments, such as swaps, to replicate the performance of an underlying index without physically owning the index's constituents. In contrast to Physical ETFs that directly hold the underlying assets, Synthetic ETFs utilize financial instruments to achieve their investment objectives. While offering potential cost efficiencies and the ability to access markets that may be challenging with physical replication, Synthetic ETFs introduce counterparty risk, as they rely on agreements with swap counterparties. Investors considering Synthetic ETFs should conduct thorough due diligence, assessing the fund's structure, associated risks, and the creditworthiness of counterparties to make informed investment decisions.
