While not as big in the States, synthetic products make up a large portion of the ETF market overseas, specifically in Europe.
Some argue that physical funds incur larger transactional costs due to portfolio rebalances, along with tracking error between the ETF and index. Synthetic ETF propoents believe that tracking errors can be avoided through swaps as the return is guaranteed to match the market. Meanwhile, synthetic ETFs have also made it easier to track less liquid or obscure markets.
For more information on ETFs, visit our ETF 101 category.
Max Chen contributed to this article.