Do index-based ETFs hold every security in the underlying index?
ETFs based on specific indexes may not hold every security in the underlying index. Many indexes contain illiquid or small capitalization securities that are costly to purchase and sell. In order to minimize transaction costs, these ETFs often use optimization techniques to design portfolios that will closely track the underlying index, but not necessarily hold all the securities in the underlying index. However, this strategy may also lead to tracking error.
