Synthetic ETF

AAA

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.

RELATED TERMS
  1. Exchange-Traded Fund (ETF)

    A security that tracks an index, a commodity or a basket of assets ...
  2. Synthetic Call

    An investment strategy that mimics the payoff of a call option. ...
  3. Synthetic

    A financial instrument that is created artificially by simulating ...
  4. Synthetic Put

    A trading strategy that combines the short sale of a security ...
  5. Swap

    Traditionally, the exchange of one security for another to change ...
  6. Underlying

    1. In derivatives, the security that must be delivered when a ...
RELATED FAQS
  1. Can an investor buy leveraged ETFs that track the automotive sector?

    As of 2015, no leveraged exchange-traded funds, or ETFs, track the automotive sector. However, a non-leveraged ETF tracks ... Read Full Answer >>
  2. What are some examples of smart beta ETFs that use passive and active management?

    There are a number of smart beta exchange-traded funds (ETFs) that use passive and active management, including the WisdomTree ... Read Full Answer >>
  3. Should you calculate Value at Risk (VaR) for counterparty credit risk?

    Value at risk (VaR) calculations may be helpful for risk management when trading credit default swaps and other derivatives ... Read Full Answer >>
  4. What is the difference between the QQQ ETF and other indexes?

    QQQ, previously QQQQ, is unlike indexes because it is an exchange-traded fund (ETF) that tracks the Nasdaq 100 Index. The ... Read Full Answer >>
  5. What is the QQQ ETF?

    The PowerShares QQQ, previously known as the QQQQ, is a widely held and traded exchange-traded fund (ETF) that gives investors ... Read Full Answer >>
  6. What are the main benchmarks that track the banking sector?

    The appropriate benchmarks for tracking banking sector performance depend on the type of banking. For instance, commercial-only ... Read Full Answer >>
Related Articles
  1. Mutual Funds & ETFs

    An Inside Look At ETF Construction

    If you're an investor who likes to understand how and why your investment products work, this article is for you!
  2. Mutual Funds & ETFs

    4 Ways To Use ETFs In Your Portfolio

    To take full advantage of these vehicles, you need to know how they can fulfill certain strategies.
  3. Mutual Funds & ETFs

    ETFs Vs. Index Funds: Quantifying The Differences

    If you are trying to choose between these two index-tracking investments, compare the costs.
  4. Options & Futures

    Are Derivatives Safe For Retail Investors?

    These vehicles have gotten a bad rap in the press. Find out whether they deserve it.
  5. Mutual Funds & ETFs

    Dollar-Cost Averaging With ETFs

    If you are investing small amounts regularly into an exchange-traded fund, be sure to do it right.
  6. Mutual Funds & ETFs

    Introduction To Exchange-Traded Funds

    Get into ETFs and enjoy the benefits of a mutual fund with the flexibility of a stock.
  7. Professionals

    Worried About Stocks? Try on Convertibles

    Convertibles are a good hedge against equity market risk (if you're o.k. with losing a bit of upside potential).
  8. Stock Analysis

    Playing Rising Rates with Ultra-Short Term Bonds

    With rising rates likely, investors may want to consider adding a dose of ultra-short bonds to their portfolios. Here are some ETFs to consider.
  9. Professionals

    Why Investors Are Bailing on Bond ETFs

    Investors are fleeing bond ETFs. Should you follow the herd? Hint: It depends on the type of bond.
  10. Chart Advisor

    How Investors are Profiting from Cyber Crime Fear

    An ETF that has seen significant gains this year in the growing field of cyber security, and the threat and fear of cyber attacks and cyber crime.

You May Also Like

Hot Definitions
  1. Inbound Cash Flow

    Any currency that a company or individual receives through conducting a transaction with another party. Inbound cash flow ...
  2. Social Security

    A United States federal program of social insurance and benefits developed in 1935. The Social Security program's benefits ...
  3. American Dream

    The belief that anyone, regardless of where they were born or what class they were born into, can attain their own version ...
  4. Multicurrency Note Facility

    A credit facility that finances short- to medium-term Euro notes. Multicurrency note facilities are denominated in many currencies. ...
  5. National Currency

    The currency or legal tender issued by a nation's central bank or monetary authority. The national currency of a nation is ...
  6. Treasury Yield

    The return on investment, expressed as a percentage, on the debt obligations of the U.S. government. Treasuries are considered ...
Trading Center
×

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!