Advantages of Synthetic Replication Methods

Medium Passive Equity Investing Replication Methods

As an investment analyst at a large pension fund, you are reviewing different replication methods for constructing a passive equity portfolio. You are primarily focused on the advantages and disadvantages of using index funds versus a synthetic replication method, which employs derivatives to mimic an index's performance. Your analysis emphasizes factors such as tracking error, liquidity constraints, and costs associated with each method.

Which of the following statements accurately describes the advantages of using a synthetic replication method compared to traditional index funds?

Synthetic replication methods often have lower management fees compared to traditional index funds.

Synthetic replication allows investors to gain exposure to a wider array of securities and derivatives not typically included in standard index funds.

Synthetic replication methods generally have a lower tracking error than traditional index funds.

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