Can be categorised as a type of credit derivative, although it should be noted that the product combines both market risk and credit risk, and so is not a pure credit derivative.
The essential difference between a TRS and a credit default swap is that the latter provides protection not against loss in asset value but against specific credit events.
Counterparties swap the total return of a single asset or basket of assets in exchange for periodic cash flows, typically a floating rate such as LIBOR +/- a basis point spread and a guarantee against any capital losses. A TRS is similar to a plain vanilla swap except the deal is structured such that the total return (cash flows plus capital appreciation/depreciation) is exchanged, rather than just the cash flows.
A key feature of a TRS is that the parties do not transfer actual ownership of the assets, as occurs in a repo transaction. This allows greater flexibility and reduced up-front capital to execute a valuable trade. This also means Total Return Swaps can be more highly leveraged, making them a favorite of hedge funds.
Total Return Swaps (TRS) are also known as Total Rate of Return Swaps (TROR).