"Hipp to be Swap, or Why Stocks Belong in Money Market ETFs"

In recent days, the question has arisen as to why money market ETFs might contain stocks and whether this is permissible. Ali Masarwah, ETF analyst and managing director of the consulting firm envestor, answers both questions with a resounding “Yes!”

May 18, 2026. FRANKFURT (envestor). I recently spoke with an analyst friend of mine at a conference about trends in the ETF market. During our conversation, the topic came up that money market ETFs can also contain stocks. We dismissed this question fairly quickly. The gist: Everything’s fine. The money market is a good proxy for the ECB’s interest rate. Money market securities, however, are often not publicly traded. Moreover, they have such short maturities that they would literally “overwhelm” ETFs due to their high turnover rate. Physically, the so-called “€STR” is therefore not investable for money market ETFs. That is why these products are swap-based. This means they do not have to hold the securities underlying the index. Some industry publications have picked up on this topic and addressed it almost in passing.

The discussion about the securities that ETFs can hold has, of course, not always been conducted in a strictly technical and objective manner.

I recall the debate over swap ETFs shortly after the 2008 financial crisis. “Do Japanese stocks belong in a DAX ETF?” At the time, this question caused quite a stir in the financial press. The media had discovered, while analyzing annual reports, that Deutsche Bank held Japanese stocks in its DAX ETFs rather than the stocks actually represented in the DAX. At the time, Xtrackers and Lyxor (now Amundi ETF) typically launched derivative-based ETFs that tracked index returns through swap transactions. In synthetic replication, an ETF holds a so-called carrier portfolio composed of highly liquid securities that are suitable from a tax or operational perspective. The carrier portfolio does not have to be filled with the components of the index underlying the ETF. That was the case back then, and it remains so today.

At the time, however, this discovery sparked a heated debate about transparency and hidden risks. Many retail investors were shocked to discover that a DAX ETF did not actually hold any DAX stocks. So-called experts loudly called for a ban on swap ETFs. Investors were advised to buy only “real” ETFs—that is, those that “physically” hold the index components.

This debate was to have a lasting impact. At the time, BlackRock relied on physical index replication as the standard in its iShares ETFs. BlackRock representatives exploited this situation in competition with Deutsche Bank (Xtrackers) and Société Générale (Lyxor). In late 2011, at the height of the euro crisis, BlackRock CEO Larry Fink made a high-profile public claim that anyone investing in Lyxor ETFs was exposing themselves to the risk of Société Générale’s unsecured bonds. This was, at best, a oversimplified and deeply unfair characterization—but it was highly effective. As a result, iShares was able to outpace its competitors from Deutsche Bank and Société Générale—in part thanks to these questionable arguments. Today, iShares is the dominant player in the European ETF market.

The bottom line is that iShares now relies on derivatives as standard practice when tracking index returns. There are an increasing number of swap ETFs from iShares tracking the S&P 500 and the MSCI World. This replication method has undeniable advantages. It is more efficient—including from a tax perspective—and often provides investors with superior returns compared to physically replicated ETFs. We at envestor also use swap ETFs to give investors efficient access to the performance of many indices.

Technical discussions should be exactly that: technically grounded and supported by factual arguments and data. Conducting a highly condensed expert debate through the mass media does not do justice to complex financial topics. On the contrary: if debates are hijacked and exploited, this can lead to a distortion of competition. That, in turn, harms investor returns—sometimes even in the long term.