Synthetic replication was first introduced in Europe in 2001. Synthetic replication is done through a type of exchange traded fund (ETF). An important attribute of this specific type of fund is that it does not hold any underlying securities featured on its benchmark. Instead of holding these securities ’s use derivatives such as swaps to track the underlying index in the process of replication. In replication of these synthetic accounts the return is 100% tied to the ETF it represents. Therefore, the ETF “replicates” the fund's it is tied to performance. In this process the ETF manager enters a swap contract with an investment bank that agrees to pay the index return in exchange for a small fee.
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