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

18 Pages Posted: 25 Sep 2014

See all articles by Cesario Mateus

Cesario Mateus

Aalborg University Business School

Yana Rahmani

University of Greenwich - Business School

Date Written: September 24, 2014

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.

Keywords: exchange-traded funds, synthetic and physical ETFs, tracking error, tracking difference

JEL Classification: G01, G15, G24

Suggested Citation

Mateus, Cesario and Rahmani, Yana, Physical versus Synthetic Exchange Traded Funds. Which One Replicates Better? (September 24, 2014). Available at SSRN: https://ssrn.com/abstract=2500870 or http://dx.doi.org/10.2139/ssrn.2500870

Cesario Mateus (Contact Author)

Aalborg University Business School ( email )

Aalborg
Denmark

Yana Rahmani

University of Greenwich - Business School ( email )

United Kingdom

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