More generally, it becomes a question of size and scope. First, size – a large ETF might require a massive amount of swaps, for which it might be difficult to find a willing counterparty. Moreover, one has to assume that counterparty’s risk on the required scale. Second, scope – a fund manager may have an easier time finding a swap counterparty in a market that is primarily swap-based (interest rates, FX) rather than cash-based (stocks), in part because the counterparty will likely want to hedge their exposure in kind. Also, more obscure objectives (like emerging markets or levered strategies) may be impracticable to pursue with cash securities.

So, if all else is equal and you have a large, sophisticated cash trading operation – maybe you prefer to deal with familiar cash equities rather than hiring derivative traders. Or perhaps you don’t want to deal with the nuances of trading – you’d rather just manage aggregate exposures – so you outsource that responsibility to a counterparty. In a deep, cash market, you may have the luxury of that choice – and SPY certainly falls in the former category.

To conclude, there’s nothing obviously better about TRS vs cash – but the key point is that there’s nothing obviously worse, either. It’s a six of one/half dozen of the other situation.

Interestingly, in Europe, equity ETFs actually are more frequently swap-based than they are in the U.S., and that has historical groundings in a few other technical aspects like the tax treatment of trading, derivative income, and issuance of new shares. The UCITS regulations have descriptions of allowable swap/counterparty exposures for such cases (for example, aggregate exposure to a single counterparty is capped at 10%, I believe).