PT  - JOURNAL ARTICLE
AU  - Christian Meinhardt
AU  - Sigrid Mueller
AU  - Stefan Schoene
TI  - Physical and Synthetic Exchange-Traded Funds: <em>The Good, the Bad, or the Ugly?</em>
AID  - 10.3905/joi.2015.24.2.035
DP  - 2015 May 31
TA  - The Journal of Investing
PG  - 35--44
VI  - 24
IP  - 2
4099  - https://pm-research.com/content/24/2/35.short
4100  - https://pm-research.com/content/24/2/35.full
AB  - This article focuses on the replication process of exchange-traded funds (ETFs). It compares the tracking ability of ETFs based on physical replication of their benchmark indexes to those of synthetic ETFs. Synthetic ETFs rely on derivatives such as swaps. For ETFs listed at the Frankfurt Stock Exchange, we show that both categories of ETFs suffer from high tracking errors. Contrary to conventional wisdom, synthetic equity ETFs are not different in terms of tracking errors from their physical counterparts. However, synthetic fixed-income ETFs have lower tracking errors than physical fixed-income ETFs. Thus, synthetic ETFs have as good or better tracking errors than physical ETFs. We identify different factors influencing tracking errors.TOPICS: Exchange-traded funds and applications, developed