Synthetic ETF

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DEFINITION of 'Synthetic ETF'

An investment that mimics the behavior of an exchange-traded fund (ETF) through the use of derivatives such as swaps. Proponents of synthetic ETFS say they do a more accurate job of tracking indexes; critics say that synthetic ETFs face counterparty risk, are not transparent and may mislead investors. Other variations on the plain vanilla ETF include currency ETFs, inverse ETFs, international ETFs, leveraged ETFs and ultra ETFs.

INVESTOPEDIA EXPLAINS 'Synthetic ETF'

Synthetic ETFs are common on the Hong Kong Stock Exchange, which differentiates them from traditional ETFs by placing an "X" in front of their names. The country's financial regulators, concerned about whether investors are financially sophisticated enough to understand the different characteristics and risk profiles of synthetic ETFs, have subjected synthetic ETFs to greater scrutiny and imposed additional requirements on the institutions that issue them. Synthetic ETFs have faced similar issues in European markets.

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  1. Exchange-Traded Fund (ETF)

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  5. Underlying

    1. In derivatives, the security that must be delivered when a ...
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    Traditionally, the exchange of one security for another to change ...
RELATED FAQS
  1. How are swap agreements financed?

    Since swap agreements involve the exchange of future cash flows and are initially set at zero, there is no real financing ... Read Full Answer >>
  2. What are the risks involved with swaps?

    The main risks associated with interest rate swaps, which are the most common type of swap, are interest rate risk and counterparty ... Read Full Answer >>
  3. What types of stocks have a large difference between bid and ask prices?

    The bid-ask spread is the difference between the highest offered purchase price and the lowest offered sales price for a ... Read Full Answer >>
  4. What are the most common leveraged ETFs that track the drugs sector?

    The most common leveraged exchange-traded funds (ETFs) that track the pharmaceutical industry are the two offered by Proshares: ... Read Full Answer >>
  5. Why would an investor consider purchasing electronic stocks for their portfolio?

    An investor would consider purchasing electronics stocks because that sector provides many opportunities for both quick profits ... Read Full Answer >>
  6. What is the automotive sector?

    In the world of finance, the automotive sector represents the financial performance and economic variables related to automobile ... Read Full Answer >>
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