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Sample replication, or optimised replication, refers to a type of exchange traded fund (ETF) that holds equities or bonds in some of the constituents of the benchmark it tracks. It differs from full replication, when an ETF holds all of the constituent securities of its benchmark.

Sample replication definition

Sample replication, or optimised replication, refers to a type of exchange traded fund (ETF) that holds equities or bonds in some of the constituents of the benchmark it tracks. It differs from full replication, when an ETF holds all of the constituent securities of its benchmark.

Sometimes, it is not practical for an ETF to offer full replication. This may happen if the index it is tracking has thousands of constituents, or when some of its constituents are not very liquid. In such instances, the costs of attempting full replication may be prohibitive.

As such, some ETFs use optimised or sample replication, which means they only contain a selection of the equities from the index they seek to track. For example, an ETF which tracks the Russell 2000 may only contain a sample of the Russell 2000, and be made up of 500 of its constituents.

Because it doesn’t hold 100% of the equities in its benchmark, an ETF with sample replication may see a larger tracking error than an ETF which is fully replicated.

 

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