Although many index funds are low cost and do a decent job of tracking the index they are benchmarked to, there are differences in indexing methods.
It’s subtle, but it’s good to know which method any index funds you own or are interested in use.
The 2 main methods, Sampling and Replication, are different in the following ways:
Sampling Method: This method is not quite a mirror of the index it benchmarks, since it uses predefined computer programs to select stocks in the index based off target criteria for that fund. The criteria can consider the various weightings a set of stock comprise for a certain country or industry. It may also consider the market cap that the stock brings to the index and to what extent that affects the representation of the index.
Replication Method: This method is a bit more passive in that it holds the same stocks as the target index in the same proportions. Same market cap, same industry composition, country composition, etc.
One isn’t necessarily better than another, although it makes sense to know, just for your own knowledge which method is used by which fund (given you hold index funds).
This information is easily found in the prospectus of any given fund or by directly contacting the fund family of the fund you are interested in.
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