Sometimes you will find that an ETF does not hold the same securities as the index it is tracking, which may mean that the ETF is “synthetic”.
While a synthetic ETF will still aim to replicate the performance of the index it is tracking, it does not achieve this by buying all the stocks (or bonds) in the underlying index, as with a “physical” ETF. Instead, a synthetic ETF will enter into a deal with a counterparty (usually a bank) who agrees to swap the returns of the index with the returns from the basket of assets which the ETF holds.
This is often done to reduce the ETF's costs, and/or when there are particular tax advantages to not holding the index's underlying stocks directly, which can result in improved performance.
It is important to note that a synthetic ETF’s holdings may therefore differ from the index the ETF is tracking.
For example, the Invecso MSCI Europe UCITS ETF is a synthetic ETF, which holds some non-European companies while still replicating the performance of the European index. The ETF holds companies like Amazon and Nasdaq (correct at the time of writing), when you might expect it to hold only European companies.
A synthetic ETF can use any “basket” of assets to replicate the index, as the index’s returns are contractually provided by the swap counterparty, rather than through holding the index’s underlying stocks directly.
You can view this previous post on our Community page, which explains more about synthetic ETFs.
We have a KIID at the bottom of every page when viewing the ETF, where you can find out more about the ETF’s replication method.
(Kindly note, we are not an advisory service and must ask all clients to do their own due diligence on all their holdings).