Swap-based ETFs under scrutiny

The first synthetic ETF was created in 2001 and was hailed as an innovative index product that mitigated tracking error. A decade later, these swap-based funds have suddenly caught the attention of regulators. In April, the Financial Stability Board warned synthetic products could be a “powerful source” of systemic risk, and said the growth of the industry warrants greater attention from supervisory bodies. Soon after, the International Monetary Fund released its Global Financial Stability paper, expressing concerns about the risks involved with synthetic replication and securities lend...