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Physical versus Synthetic Exchange Traded Funds. Which One Replicates Better?

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Document pages: 15 pages

Abstract: This paper investigates the tracking performance of physical and synthetic equity exchange traded funds listed (ETFs) on the London Stock Exchange (LSE) during the period 2008 to 2013. We examine the ETFs accuracy in replicating their benchmark returns, with different geographical focus, applying several tracking metrics and including the financial crisis period. First, we did not find evidence that synthetic ETFs outperformed physical ETFs in terms of lower daily tracking performance. Second, the results show that the ability of ETFs to replicate its benchmark index’s returns depends on characteristics of the securities composing the index. Third, we provide evidence that the 2008-2009 financial crises had negative impact on daily tracking performance for all ETFs. Fourth, the method to estimate the tracking error impacts the results.

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