In the case of full physical index replication, the ETF acquires all securities represented in the underlying index in accordance with their index weightings. Hence, the ETF is in physical possession of the index components and thus an exact replica of the index. If any changes are made to the index, for example through index adjustments or capital actions of the represented securities, the ETF replicates these changes, making transactions necessary on a regular basis. The ETF regularly distributes income, in the form of dividends or coupons for example.
The full physical replication method is characterized by simplicity and minimal tracking error. Securities lending
A number of select physically replicated ETFs engage in securities lending in order to penitentially 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%.