2009 morning exam #7B

$3 million is available to invest in a passive portfolio benchmarked to the Russell 3000. Determine which method is the most appropriate method for constructing the equity portfolio: full replication, stratified sampling or optimization.

Given the existence of ETFs, why isn’t full replication the correct answer?

  1. I used the thumb rule : if number of stocks < 1000…choose full replication,

  2. Another if index contains mainly small cap then it becomes costly.

In the guideline answer, they have mentioned this. However,question specifically says…“The benchmark for the portfolio is the Russell 3000 Index, which is based on market capitalization and consists of 3,000 large U.S. publicly-traded companies”. So IMO, this should not be problem.

I checked on this…I guess because of the portfolio size…as the min invest in ETF is greater than the available $3 mil…for eg

Vanguard Russel 3000 ETF : min inv - $ 5 mil


Respectfully , ETF s are not the same as full replication . Full replication means you actually invest in stocks of the index , all of them . That can take considerable cost and considerable time

The Russell 3000 iShare is not full replication?

I believe it is not , it excludes the most illiquid names .

Most (probably all?) index funds or ETFs with such a large number of holdings will using a sampling method.

Learned something new about index funds. From the iShares prospectus:

“BFA uses a representative sampling indexing strategy to manage the Fund. “Representative sampling” is an indexing strategy that involves investing in a representative sample of securities that collectively has an investment profile similar to the Underlying Index.”