Physical replication
Physical replication means an ETF directly buys the securities in its index. It is the most transparent method, used by iShares, Vanguard and SPDR.
A physically replicated ETF directly holds the securities in its benchmark index. For a physical MSCI World ETF, the fund actually buys shares of Apple, Microsoft, Nestlé, Toyota and the roughly 1,500 other index constituents, in proportions aligned with index weightings.
Full replication vs optimised sampling
Full replication means buying every index security in exact proportions — well-suited to indices with few, highly liquid components like the S&P 500 (500 stocks) or CAC 40 (40 stocks). Optimised sampling means buying a representative subset — used for very broad indices (MSCI ACWI, FTSE All-World with 3,700+ stocks) where small components are illiquid and expensive to trade.
Advantages
- Full transparency: portfolio published daily by the issuer
- No counterparty risk (no swap, no banking counterparty)
- Securities lending income can improve net performance
- Simple structure for investors to understand
Physical replication and PEA eligibility
A physically replicated ETF tracking a global index (MSCI World, S&P 500) cannot be PEA-eligible. To qualify for a French PEA, 75% of the fund's physical portfolio must be invested in EU/EEA-domiciled company shares. A physical MSCI World ETF holds mainly US stocks (~70% of the index). Only synthetic ETFs can combine PEA eligibility with global non-EU index exposure.
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