Physical vs Synthetic

Why can a "synthetic" S&P 500 ETF beat a physical one?

A physical Irish fund owns US shares and loses 15% of every US dividend to US tax.

A swap ETF owns other assets; a bank pays it the index return, and US law does not tax index swaps.

justETF (July 2025): S&P 500 swap ETFs led physical ones by 0.12% to 0.26% a year, €12 to €26 on €10,000.

The price of that edge: bank risk, which EU rules cap at 10% of the fund.

Would you take the bank risk for the tax edge?

Education, not investment advice.

Read the sheet as text

Physical vs Synthetic.
Two ways to copy an index. On US shares, the swap has a tax edge.

Physical: buys the shares in the index. An Irish fund pays 15% US tax on dividends. 15%: US tax on dividends.
Synthetic: a bank pays it the index return. US law exempts index swaps from that tax. 0%: US tax on dividends.

The catch: the tax edge comes with bank risk. EU rules cap it at 10% of the fund per bank.
Real numbers: €10,000 → €12 to €26 a year more from S&P 500 swap ETFs than from physical ones (justETF, July 2025).
On MSCI World the best swap ETF led by only 0.01% a year: the fee decides.

Sources (3)

Why synthetic ETFs have the edge in US-dominated marketsjustETF, 9 July 2025 (data to 30 June 2025): Irish physical funds pay 15% US withholding (30% standard rate halved); swap ETFs 0%, as US law exempts swaps on indices such as the S&P 500 and MSCI World; S&P 500: synthetic ETFs ahead of physical ones by 0.12% to 0.26% a year; MSCI World: the leading synthetic ahead of the best physical by 0.01% a year, one swap ETF has a TER of 0.45% against 0.06% for cheap physical ones. Checked 2026-11-02.
UCITS Directive, Article 52(1)ESMA single rulebook: counterparty risk to one credit institution on non-centrally cleared derivatives at most 10% of assets. Checked 2026-11-02.
Swap ETFs: Synthetic replication of ETFsjustETF: the swap counterparty pays the index return; the fund holds a substitute basket. Checked 2026-11-02.