Synthetic replication

Synthetic replication is a method where an ETF does not directly buy the securities in its benchmark. Instead, the fund enters a total return swap with a bank. The bank contractually commits to deliver to the fund the exact performance of the target index (e.g. MSCI World) in exchange for the performance of the fund's physical basket.

How the swap works

The fund holds a basket of physical securities — often European stocks or liquid bonds — and enters a swap with a partner bank. Each day, the fund transfers its physical basket's performance to the bank. In return, the bank delivers the MSCI World's performance. Net result for the investor: MSCI World exposure while physically holding only European equities.

Central role for PEA

Synthetic replication is what allows French investors to access global markets via their PEA. Without the swap, tracking MSCI World or S&P 500 from a PEA would be impossible. Key PEA-eligible synthetic ETFs in 2026: CW8 (Amundi), WPEA (Invesco), LCWD (Lyxor/Amundi).

Counterparty risk: real but regulated

UCITS regulations cap maximum exposure to a single counterparty at 10% of net fund value. Major issuers manage this through overcollateralisation, daily swap resets, and diversification across multiple bank counterparties.