An exchange traded fund (ETF) that holds the actual assets it is intended to track. It tracks a target index by holding all, or a certain number, of the underlying assets of the index. For example, an ETF that tracks a stock index will consist of either all the listed companies in the index, or a representative sample of that basket of stocks. A physical ETF tracks the underlying index by buying all of the stocks in the index, according to the same weights applied by the index.

A physical ETF simply owns the securities of an underlying asset. For example, a physical ETF tracking the CAC 40 would simply hold shares of all 40 companies listed in this index in the same weights as the index .

This type of funds is not associated with a counterparty risk, given its composition and operating model, unless it largely involves securities lending.