Synthetic replication refers to a type of exchange traded fund (ETF) that doesn’t hold any of the underlying securities featured on its benchmark.
Rather than holding underlying securities (known as physical replication), synthetically replicated ETFs rely on derivatives such as swaps to try and track their target index. They tend to be more popular in Europe.
For instance, the DB X tracker FTSE Vietnam UCITS ETF 1C is an ETF which aims to track the FTSE Vietnam Index. Because it is difficult for foreign investors to get exposure to Vietnamese equities, the ETF is synthetically replicated with swap counterparties which Deutsche Bank AG has approved.
If an ETF instead contains the securities listed on its benchmark, it is referred to as physically replicated.
