Quick question on full replication of an equity index: Schweser: “To create an indexed portfolio using full replication, all the stocks in the index are purchased according to the weighting scheme used in the index. (…) The advantage of replication is that there is low tracking risk and the portfolio only needs to be rebalanced when the index stocks change or pay dividends.” Why does the PF need to be rebalanced in case of dividend payment?
If you’re tracking an index that includes the reinvestment of dividends (like the S&P 500 Total Return index), you need to purchase additional shares in order to maintain index replication.