Strategy for $10 million AUM index fund for Russell 2000

CFA Level III
#1

To minimize tracking error, what would one use?

Full replication? Optimization? Or stratified sampling?

I don’t know how many stocks Russell 2000 has but if it is 2000 (http://www.russell.com/indexes/data/fact_sheets/us/russell_2000_index.asp), you have about $5000 per stock if they were equal-weighted, and they are not. So you’ll probably have $100 to buy some stocks, barely enough. The question is, is that enough for full replication?

#2

To minimize tracking error - you would invest in Full Replication. Cost would be highest though

#3

Makes no sense to own $5,000 per stock. It’s certainly not full replication. My guess is optimization as they want minimize tracking error.

#4

Yup.

1 Like
#5

On a relevant note, just a quick question. If the goal is to minimize TE:

  • if a portfolio was reconstituted annually, but changed to quarterly (more frequent). Would that help in minimizing TE? I would say yes, but not 100% sure.
#6

For me, it’s stratified sampling. Can’t possibly do full rep at that amount. Get your sectors roughly in line and that’s the best you can do. Unless you wanna put it all on red. :wink:

And yea, it is roughly 2k companies.