In the case of optimized physical replication, the ETF holds a sample of the securities in the underlying index. It seeks to achieve a return similar to that of the original stocks represented in the index by implementing analytical tools and mathematical optimization procedures to define a subset of the index constituents. The optimized physical replication method can be utilized to increase liquidity and minimize tracking error.
The optimized physical replication method is particularly suitable for very broad-based indices. For example, the MSCI World Index comprises approximately 1,600 stocks from a variety of markets, jurisdictions and currency zones. Accordingly, full physical replication of the index would involve high transaction costs. A number of these securities are not very liquid or have only minimal impact on the performance of the Index due to their low weighting. Transaction costs can be reduced by excluding these securities Securities lending
A number of select physically replicated ETFs engage in securities lending in order to generate additional returns and reduce investors' net costs, whereby the ETF's securities are lent out for a fee. Securities lending transactions of UBS ETFs are over collateralized to a minimum of 105%.