CMFAS M8 Exchange-Traded Funds (ETFs) question: trade-off between synthetic and physical ETFs

CMFAS M8Exchange-Traded Funds (ETFs)

Which statement correctly captures the trade-off between synthetic and physical ETFs?

A Physical ETFs always achieve exactly zero tracking error
B Synthetic ETFs generally have higher tracking error than physical ETFs
C Synthetic ETFs often show lower tracking error but take on counterparty risk instead
D Tracking error is unaffected by a fund's fees and costs

Show the answer and explanation

Answer: C. Synthetic ETFs often show lower tracking error but take on counterparty risk instead

Synthetic ETFs often exhibit lower tracking error because the swap contractually delivers the index return, but they achieve this tighter tracking by taking on counterparty risk that physical ETFs avoid.

Common mistake

Forgetting that a synthetic ETF's tighter tracking is bought with added counterparty risk.

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CMFAS M8 Exchange-Traded Funds (ETFs) question: trade-off between synthetic and physical ETFs

Answer: C. Synthetic ETFs often show lower tracking error but take on counterparty risk instead

Common mistake

Related CMFAS M8 questions

CMFAS M8 Exchange-Traded Funds (ETFs) question: trade-off between synthetic and physical ETFs

Answer: C. Synthetic ETFs often show lower tracking error but take on counterparty risk instead

Common mistake

Related CMFAS M8 questions