Specifically, Vanguard points out several safe-practices for investing in synthetic ETFs: the ETFs should have multiple, unaffiliated counterparties; transparency and disclosure into counterparties and associated swap costs; transparent, liquid collateral basket with frequent updates on holdings and exposure; minimums for assets placed in the collateral basket; daily collateral reconciliation, overcollaterilzation of amounts at risk; and direct access to collater in the event of counterparty default.
In the U.S., synthetic ETFs may refer to leveraged and inverse fund products that utilize swaps in their strategies. About 3% of ETF assets in North America may be considered “synthetic,” whereas over one-third of ETF assets in Europe are synthetic products.
For more information on ETFs, visit our ETF 101 category.
Max Chen contributed to this article.