Passive investing is an investment approach that consists of replicating closely a selected benchmark rather than actively trying to outperform it. Passive ETFs represent an interesting solution to put in practice this strategy. How do ETFs replicate the reference benchmark?
Physical replication is one of the two main approaches that can be adopted by ETFs, in terms of replication strategy. The main point to keep in mind about physical ETFs is that they physically buy the securities contained in the tracked benchmark, without using derivatives to replicate it.
Main Features of Physical ETFs
If an ETF is physically replicating the benchmark it tracks, this means that the fund manager is buying all (or a part in case “optimized replication” is practiced) of the underlying securities. A physical ETF is in this was very transparent as the investor knows exactly how his money is being deployed by the manager and the counterparty risk is eliminated. No third parties are in fact involved.
Cons of Physical ETFs
A potential con of physical ETFs is that they might prevent investors from accessing certain particular markets. For example there might be markets where foreign ownership limits are in place or liquidity is very low. Such features might prevent the fund manager from effectively accessing some securities. Examples could be emerging markets or certain segments of the bond market.
Our Offer
At VanEck Europe we are proud to offer our clients only physical ETFs. This means that the securities in the tracked indices are physically bought; their price evolution is not replicated by using derivative contracts. Investment transparency is thus ensured.