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Synthethic replication

  • The Tracking Error (TE) is a measure to assess how close an ETF tracks the index. This gives a reasonable tool to check the stability of the ETF tracking ability. While the volatility gives a general risk on the return of the ETF and is directly attached to the volatility of the index, the TE presents an additional risk measure that highlights the risk of the replication and not the Market risk.

  • The issue of physical versus synthetic replication has left investors with more questions and suspicion than clear responses. However, to focus on the above would be narrow minded when choosing the right investment for your portfolio.