Physically replicating ETFs
In simple terms, a physically replicating ETF (exchange traded fund) does as the name suggests. It is an index funds that track an index by purchasing either all or large portions of the individual securities contained therein (e.g. stocks or bonds) according to their weighting.
A 100% replication by a physically replicating ETF is also referred to as full replication, while a partial replication is referred to as partial replication (sampling). In sampling, representative index stocks are selected for replication. During optimisation, stocks with the highest correlation to the index are used. However, these do not necessarily have to be securities from the index.
In addition to physically replicating ETFs, there are also synthetically replicating ETFs.