Evaluating Passive Equity Replication Methods

As a portfolio manager specializing in equity investments, you are evaluating various replication methods for a passive investment strategy aiming to track the performance of a specific large-cap equity index. One method you consider is direct replication, while exploring alternatives such as stratified sampling and optimization techniques. Your goal is to replicate the index's performance with minimal tracking error and transaction costs.

Given these methods, which of the following replication methods is typically the most efficient in terms of transaction costs and tracking error when dealing with a highly liquid and well-diversified index, especially under market conditions of high volatility?