Synthetic ETF Definition

Learn the definition of synthetic etf and other ETF terminology from the etf.com glossary.

ETF
|
Reviewed by: etf.com Staff
,
Edited by: etf.com Staff

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.

Related Terms

Exchange-Traded Fund, Derivatives Based ETF, Physical ETF

ETF Glossary is etf.com’s collection of key terms and definitions related to exchange-traded funds. ETFs are investment funds that are traded on stock exchanges, and they can encompass a wide range of asset classes, including stocks, bonds, commodities and more. Given the diverse range of ETFs and the complexity of financial markets, having a clear understanding of ETF-related terminology is instrumental for investors looking to make informed decisions, manage risks effectively and navigate the evolving landscape of ETF investments.