Synthetic ETF, unlike Physical ETF, utilize swaps and derivatives to replicate the performance of the market. A swap is a promise from a counterparty, usually an investment bank, to replicate the performance of the market or index. For instance, many leveraged and inverse ETFs use swaps and derivatives to achieve their performance objective on a daily basis.

While not as big in the United States, synthetic products make up a large portion of the ETF market overseas, especially in Europe.

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