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​.