Physically Versus Synthetically Replicated Trackers: Is There A Difference In Terms Of Risk?

Abstract

This article presents the two methods of constructing exchange traded funds and questions whether investors should privilege one structure over the other. To do so, the authors detail the sources of tracking error and risks inherent in each method. As synthetically-created funds include an additional dimension of risk, the authors seek to determine to what measure investors are compensated for this added risk.