What is a synthetic ETF?

A synthetic ETF seeks to track an index using derivatives, commonly swap agreements with a counterparty, rather than fully holding the underlying securities.

This structure can be used when physical replication is difficult or expensive, and it can sometimes improve tracking. But it introduces counterparty risk and relies on the terms and collateral arrangements of the swap.

If you're considering a synthetic ETF, read how it's structured, what collateral is posted, and who the counterparties are. Synthetic doesn't automatically mean "bad," but it's a different risk package than a physically replicated ETF.