In which type of ETF does the portfolio manager select securities and their weighting to best match the performance of an index?

In ETFs, portfolio management involves selecting securities to match an index's performance. Full

replication is a method where the portfolio manager buys all the securities in the index in their exact

proportions.

Types of ETF Management Approaches

Full Replication:

Involves holding every security in the index.

Ensures minimal tracking error and high fidelity to the benchmark.

Suitable for highly liquid and straightforward indexes like the S&P/TSX Composite.

Sampling:

Used for large, complex indexes where holding all securities is impractical.

Selects a representative sample to approximate the index's performance.

Rules-Based and Synthetic ETFs:

Employ predefined rules or derivatives rather than physical securities.

Why D is Correct

Option D reflects the primary method of mirroring an index's performance through full replication,

ensuring accuracy and minimal tracking error.

Reference:

Volume 2, Section 19: Exchange-Traded Funds—Full Replication vs. Sampling​.

Volume 2, Section 13: Efficient Market Hypothesis—Implications for Passive Management​.