Synthetic ETFs: Unlocking Efficient Access to Global Markets
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Key takeaways
- Synthetic ETFs can provide efficient access to markets that are difficult to reach through physical replication
- In some cases, they may deliver more precise and consistent index tracking
- Alongside physical ETFs, they can play an important role in portfolio construction
Exchange-traded funds (ETFs) have revolutionised how investors access markets, offering transparency, accessibility, and cost efficiency.1 While most are familiar with physically replicated ETFs—where the fund buys and holds the underlying securities—synthetic ETFs provide an alternative route that can, in some cases, deliver more efficient or precise index exposure. As the leading European provider of synthetic ETFs2, Amundi believes this replication method could offer, in some cases, important advantages for investors. In this article, we outline when and how it can be used most effectively.3
Synthetic ETFs in a nutshell
Synthetic ETFs, also known as swap ETFs, use derivatives, typically total return swaps with a counterparty, to replicate the performance of an index. This structure sometimes prompts questions, but the reality is that over the past decade, the European synthetic replication framework has been significantly strengthened through enhanced regulatory oversight and the adoption of best practices by synthetic ETF issuers. These improvements increased the robustness and transparency of synthetic ETFs, making them a critical tool for accessing certain market exposures where physical replication may be less efficient or feasible.
Broader scope of replication
One of the primary features of synthetic ETFs is that they can replicate virtually any type of index. Physical replication is straightforward when an index is more focussed or highly liquid, but it becomes far more complex when an index is much broader—containing sometimes thousands of constituents—or when it includes securities that are difficult to access.
Synthetic ETFs, by contrast, achieve exposure via a swap, allowing for a more faithful and efficient replication of the index. This can translate into tighter tracking versus the benchmark, even in more complex or less accessible markets.
Benefiting from counterparties’ scale and expertise
Another strength of synthetic replication is that the swap counterparty—typically a large investment bank—may be able to source securities under conditions more favourable than the ETF could achieve directly. Thanks to their scale, global presence, and expertise, counterparties can often access markets more efficiently, trade with lower costs, or benefit from more favourable tax conditions.
The synthetic structure means these benefits can be passed through to the ETF, which in turn may offer superior index performance relative to a physically-replicated equivalent
Where synthetic ETFs can add the most value
There are several areas where synthetic ETFs often demonstrate potential advantages over physical replication.
Emerging market exposures
Single-country and regional emerging market indices can be challenging to replicate physically. Many of these markets are difficult to access, sometimes less liquid, more costly to trade, or require specific local arrangements such as opening accounts in-country, trading in local currency, or navigating complex tax regimes. Some also impose foreign ownership restrictions.
By using a swap, synthetic ETFs can overcome these hurdles, offering efficient exposure to these markets without the operational and regulatory complexity.
US and global equity exposure
Dividend taxation is a critical consideration when accessing US equities. Physically-replicated ETFs are typically subject to a withholding tax of 15–30% on US equity dividends, depending on the fund’s domicile. Synthetic ETFs, however, can benefit from more favourable treatment when tracking a so-called “Qualified index” such as the S&P 500.4
In such cases, the swap counterparty can pass on close to 100% of the dividends, which can materially improve the net performance of the ETF compared with a physically-replicated equivalent. This dividend advantage has been a compelling driver of demand for synthetic ETFs on core US benchmarks.
European equity exposures
European markets can also be expensive to replicate physically due to high trading and investment costs. Here again, synthetic ETFs can prove more competitive. Creation fees for synthetic funds can be particularly attractive, making them a cost-effective way to access European equities.
Risk considerations and counterparty management
Of course, synthetic ETFs introduce considerations that investors must assess. The primary concern is counterparty risk, as the ETF relies on a swap with an investment bank. However, European regulation (UCITS and EMIR) require strict risk-mitigation measures, including a maximum on the daily counterparty risk level as well as daily collateralisation.5 These frameworks ensure that synthetic ETFs operate within a robust risk-management environment. Within this context, choosing an issuer that employs a competitive multi-swap model, with strict control of substitute basket risk and daily resets, can provide an additional operational edge to performance.
Transparency has also improved considerably. Today, ETF providers typically disclose replication methodologies, counterparties selection process, counterparty risk levels, collateral composition and giving investors the information needed to evaluate the structure.
A tool for efficient portfolio construction
Synthetic ETFs are not a replacement for physical ETFs—they are a complementary tool. For liquid and easily accessible markets, physical replication remains a straightforward choice. But for harder-to-reach markets or indices where tax treatment or costs materially impact returns, synthetic ETFs can provide more efficient, precise, and potentially more rewarding access.
For investors aiming to deliver optimal outcomes, understanding both approaches—and where each excels—is essential. Synthetic replication expands the toolkit, offering opportunities to enhance performance and simplify access to markets that would otherwise be cumbersome or costly to reach.6
Conclusion
Synthetic ETFs have matured into an integral part of the European ETF ecosystem. By leveraging counterparties’ expertise, easing access to complex markets and unlocking potentially favourable tax treatment, they provide investors with a practical, efficient way to capture index returns.
In an environment where cost efficiency, precision, and transparency are paramount, synthetic ETFs should not be overlooked. They are more than just an alternative to physical replication—they are a powerful instrument offering the potential to build better portfolios.
1. Investment involves risks. For more information, please refer to the Risk section below.
2. Source : Based on ETFGI data for the UCITS ETFs Market as of August 2025
3. The opinions expressed are those of Amundi as of 06/10/2025 and are subject to change."
4. Under US regulation “871(m)”, certain derivative contracts referencing Qualified Indices may receive more advantageous tax treatment.
5. UCITS : “Undertakings for Collective Investment in Transferable Securities“ – European Directive 2014/91/EU. EMIR: “European Market Infrastructure Regulation” – Regulation No 648/2012
6. Investment involves risks. For more information, please refer to the Risk section below.
CAPITAL AT RISK - ETFs are tracking instruments. Their risk profile is similar to a direct investment in the underlying index securities. Investors’ capital is fully at risk and investors may not get back the amount originally invested.
KNOWING YOUR RISK
It is important for potential investors to evaluate the risks described below, and in the fund’s Key Information Document (“KID”) for non-UK investors or Key Investor Information Document (“KIID”) for UK investors, and prospectus available on our websites www.amundietf.com.
UNDERLYING RISK - The underlying index securities of an ETF may be complex and volatile. For example, ETFs exposed to Emerging Markets carry a greater risk of potential loss than investment in Developed Markets as they are exposed to a wide range of unpredictable Emerging Market risks
REPLICATION RISK - The fund’s objectives might not be reached due to unexpected events on the underlying markets which will impact the index calculation and the efficient fund replication.
COUNTERPARTY RISK - Investors are exposed to risks resulting from the use of an OTC swap (over-the-counter) or securities lending with the respective counterparty(-ies). Counterparty(-ies) are credit institution(s) whose name(s) can be found on the fund’s website amundietf.com. In line with the UCITS guidelines, the exposure to the counterparty cannot exceed 10% of the total assets of the fund.
CURRENCY RISK – An ETF may be exposed to currency risk if the ETF is denominated in a currency different to that of the underlying index securities it is tracking. This means that exchange rate fluctuations could have a negative or positive effect on returns.
LIQUIDITY RISK – There is a risk associated with the markets to which the ETF is exposed. The price and the value of investments are linked to the liquidity risk of the underlying index securities. Investments can go up or down. In addition, on the secondary market liquidity is provided by registered market makers on the respective stock exchange where the ETF is listed. On exchange, liquidity may be limited as a result of a suspension in the underlying market represented by the underlying index tracked by the ETF; a failure in the systems of one of the relevant stock exchanges, or other market-maker systems; or an abnormal trading situation or event.
VOLATILITY RISK – The ETF is exposed to changes in the volatility patterns of the underlying index relevant markets. The ETF value can change rapidly and unpredictably, and potentially move in a large magnitude, up or down.
CONCENTRATION RISK – ETFs can select a large portion of their assets in a particular issuer, industry, stocks or type of bonds, country or region for their portfolio. Where selection rules are extensive, it can lead to a more concentrated portfolio where risk is spread over fewer stocks. Where selection rules are extensive, it can lead to a more concentrated portfolio where risk is spread over fewer stocks. This can mean both higher volatility and a greater risk of loss.
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Amundi Asset Management (Amundi AM)
French “Société par Actions Simplifiée” - SAS with a share capital of €1 143 615 555
Portfolio management company approved by the French Financial Markets Authority (Autorité des Marchés Financiers) under no.GP 04000036
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