Failed to load licensing components!

Please RE-INSTALL / REPAIR SKIN! DO NOT UNINSTALL THEME which will cause unrecoverable data loss!

ETF Replication Methods :

ETFs are simply designed to replicate the performance of their benchmark index. ETF Funds allows an investor to diversify their investment throughout the index with purchase of a single ETF share. With buying a piece of ETF share an investor is also eligible for the dividends and interest payments with ETFs.

Physical ETF Function

While creating an ETF Fund that tracks Index, the investment management company have to take two major decisions, first is about the legal structure of the fund and another is the methodology which is to be used for the replication.

Most of the ETF Funds in the US are organized as unit investment trust and in Europe, ETFs are organized as open-end investment companies with UCITS (Undertakings for Collective Investments in Transferable Securities).

UCITS regulations enable investment funds to use financial derivative products. Whereas investment Company Act in the US limits most of the US-listed equity funds from using derivative products to track an index, they are restricted to use physical replication method.

The choice of legal structure and replication method decides that how precisely and accurately ETF Fund can track the benchmark index.

There are two popular methods that ETF providers used to reproduce the performance of an index:

  1. 1. Physical Replication
  2. 2. Synthetic Replication

Physical Replication :

Physical Replication is a traditional form of replication method and widely used in the US. It can be accomplished by holding all the securities of its target index in same proportion which is known as Full Replication or by purchasing largest index members having the major weightof an index, it’s known as Sampling Replication.

Physical Replication

Physical ETF Function

Full Replication mostly used when an index has the manageable number of securities and when the securities of an index are easy to bought and sold. Sometimes full replication is not technically or financially feasible. It is quite expensive in terms of commissions, especially for the large indexes containing hundreds or thousands of stocks.

At that time Sampling Replication comes into the picture, it is used when full replication is neither cost-efficient nor required to replicate the benchmark index.

Here the choices of underlying securities or stocks are made depending upon the market capitalization and index weightage of that particular security since it is not efficient to hold every individual stock in the index.

The advantage of using physical replication method is that it tracks its target index closely. Physical Replication is most transparent and easy to understand since the investor knows the nature of his investment and can track the composition of the index on daily basis.

Synthetic Replication :

Synthetic Replication Method is introduced in European financial market in the year 2001. It is introduced as an alternative to traditional Physical Replication Method.

Synthetic Replication is a process of replicating an index performance without holding underlying securities of an index. This method uses derivative products such as Swaps to achieve the desired results of the index tracking.

Synthetic Replication

Physical ETF Function

In Synthetic Replication, there is an involvement of Counterparty, such as Investment Bank. The ETF Fund and Counterparty (Investment Bank) enters into the swap agreement in which the counterparty agrees to provide the returns of an index to ETF Fund in exchange for performance of the collateral basket.

Synthetic method of replication comes with several advantages over physical method. It assures ETF fund manager the exact returns of an index since the counterparty agrees to pay it in SWAP agreement and hence the manager does not need to worry about the composition of an index.

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


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

SAMT AG Bleicheplatz 4, 8200 Schaffhausen, Switzerland +41 44 505 1169

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


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


Why dividend collectors usually achieve less return

If you believe the blogs about dividends, then dividends appear the easiest way to really get passive income. Financial freedom with dividends or similar slogans are repeated mantra-like..Read more


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


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


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