What is stratified sampling in ETF replication?

What is stratified sampling in ETF replication?

• A. It uses a representative sample from each sector of the index.
• B. It tracks all index constituents
• C. It uses derivative swaps
• D. It ignores sector balance

Answer: (A)

Stratified sampling divides the index into sectors and selects a representative subset of stocks from each sector so the ETF’s sector mix mirrors the index. This approach preserves sector exposure and the overall risk/return profile, while reducing the number of securities held and the costs of trading. That’s why using a representative sample from each sector is the best description. It differs from full replication (holding all constituents) and from synthetic methods that use swaps, and it deliberately maintains sector balance rather than ignoring it.

Stratified sampling divides the index into sectors and selects a representative subset of stocks from each sector so the ETF’s sector mix mirrors the index. This approach preserves sector exposure and the overall risk/return profile, while reducing the number of securities held and the costs of trading. That’s why using a representative sample from each sector is the best description. It differs from full replication (holding all constituents) and from synthetic methods that use swaps, and it deliberately maintains sector balance rather than ignoring it.