A type of exchange traded fund (ETF) that tracks the specified index by holding all, or part, of the underlying assets of the index. For example, an ETF pegged to the S&P 500 will consist of either all the index components- i.e., 500 companies, or part of that, usually being a representative section or basket of stocks, according to the weights applied by the index.

Physical ETFs hold the actual target assets constituting the defined index or group of assets. A physical ETF may also engage in certain lending transactions as part of its scheme. For example, a fund may lend securities to investors with no holdings in the ETF. For such lending, the fund is exposed to a counterparty risk in its attempts to secure additional returns through lending of its securities.