Physical Replication :

ETFs are designed to mimic their benchmark index, one of the simplest way to accomplish that is buying all the underlying securities of an index or representative sample. This method is known as Physical Replication and the ETF is known as Physical ETF.

There are two types of Physical Replication :

  • 1. Full Replication
  • 2. Sampling Replication

Full Replication means buying all securities of an Index in a similar weightage as securities have in the index to form an ETF Fund. For example, ETF designed to track the performance of the S&P 500 Index, then the fund manager will have to buy every single security of an S&P 500 Index in the same weightage as they have in the index.

Full Replication is one of the most transparent method of replication. The downside of this method is that it's more expensive to the investor since buying and selling of securities is huge hence it charges higher management fees.

Physical ETF Function

Physical ETF Function

If there are huge number of securities present in the Index then the securities that hold sufficient liquidity will be acquired by ETF, it is known as Sampling ETF.

Sampling Replication is used when buying every single security of an index is impossible and also inefficient. For example, If the index to be replicated is consist of more than 2000 securities then it is almost impossible to buy all securities of an index.

By avoiding the securities which are illiquid,having low index weightage and does not have any major impact on fund performance, the fund can significantly reduce the cost. Sampling ETFs generally suffers from tracking errors and to reduce the tracking error the securities that have the high correlation to the performance of reference index are added to the ETF Fund.

Note: It has been observed that iShares commonly uses Physical Replication Method.

We are a Swiss registered Wealth Manager and we can help you to manage your money with scientific concepts.

googlerate
Outstanding

We have successfully developed many free diversified ETF portfolios for our customers and they are more then happy and rated our service with based on 34 reviews.

googlerate
SAMT AG Bleicheplatz 4, 8200 Schaffhausen, Switzerland +41 44 505 1169 web@samt.ag

We have successfully developed many free diversified portfolios for our customers and they are more then happy and rated our service with 5.00 from 5 stars based on 10 Reviews.

We have picked some articles for you to read

capital-investment

Secret Why Funds Always Invest Their Money in Active Investment

Since the dawn of the International Stock Markets, investors have been trying to generate returns by investing in individual stocks, commodities or in Government Bonds.. Read more

ETFs

What is an ETF?

ETFs are funds or collective investment schemes where many investors pool their money together and invest collectively into assets...Read more

capital-investment

How to Invest Your Money in Best Performing Investment Funds

Investment Funds are pooled or cooperative investment vehicles where all the money from all the individual investors is put together under the name of the Funds.. Read more

capital-investment

11 Most Important Concepts Of Behavioral Finance Theory

Behavioral finance is a famous field of the finance that suggests the theories based on psychology (psychology finance or behavioral economics) in order to explain the concept of stock market anomalies.. Read more

capital-investment

11 Habits Of Successful Investors - Strategic Asset Management

There is nothing trivial when it comes to accumulating wealth and investing especially if the investors are confused between desired results and avoiding the risk factors. Read more

Yes, I want to grow my Wealth