Explain the Difference between a Physically-Backed and a Synthetic ETF in the Context of Financial Derivatives

A physically-backed (or spot) ETF holds the actual underlying assets, such as Bitcoin or gold. A synthetic ETF does not hold the assets directly but uses financial derivatives, like total return swaps, with a counterparty to replicate the performance of the underlying asset or index.

Synthetic ETFs introduce counterparty risk, which is absent in physically-backed ETFs.