Stratified Sampling Bond Indexing is a method of bond indexing that divides the index into cells, each cell representing a different characteristic, and that buys bonds to match those characteristics.
Stratified sampling starts with dividing the index securities across a variety of characteristics. These could include industry, growth, value, yield and market capitalization, among many other possibilities. Stocks are categorized within a matrix of all such categories and each cell would be assigned a weight based on the weight of that group of stocks in the index. Then, a stock would be randomly chosen from each cell and weighted according to that cell’s weight in the index.
Stratified sampling allows the portfolio to match the basic characteristics of the index without requiring full replication. The more dimensions within the matrix, the more closely the portfolio will match the index.
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