Beware The Etfs With Tracking Error
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that can make mutual funds look good by comparison. Exchange-traded funds ideally provide the return of a specific stock or bond index, minus fees. But in the global and bond categories,
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some ETFs are lagging their indexes by much more than that. The problem is etf beta called tracking error and it should be a top consideration when you're researching ETFs for your portfolio. An example of an etf standard deviation ETF with significant tracking error is the iShares MSCI EAFE Index Fund , which offers a way to invest in stock markets outside North America with the benefit of currency hedging. The expected tracking error http://www.wsj.com/articles/SB125201437629284621 for this ETF would be the return of the underlying Morgan Stanley Capital International Europe Australasia Far East Index in Canadian dollars, minus the 0.5-per-cent management fee and a little extra to cover other costs. The real-life gap between the index and the fund is a fair bit larger, though. Data on the iShares website ( ca.ishares.com) show the index lost 1.4 per cent annually over the five years through https://sec.theglobeandmail.com/globe-investor/investment-ideas/watch-out-for-tracking-error-when-buying-etfs/article1392160/?service=amp Sept. 30, while the ETF itself lost an average annual 2.6 per cent. ETF investing hinges on the idea that the returns of a large number of mutual funds at any given time will fall short of benchmark stock and bond indexes. But this assumes tracking error isn't a spoiler. In fact, tracking error for some ETFs has reduced their returns to the point where they look uncompetitive with mutual funds. For example, international equity funds outperformed XIN on average over the past five years by holding their losses to just below 2 per cent annually. Analyst Pat Chiefalo of National Bank Financial has been working on creating model ETF portfolios recently and he's concluded that in the Canadian equity and bond categories, ETFs are very competitive against mutual funds. But thanks in large part to tracking error, he's less positive about global and emerging markets ETFs. "From a foreign equity perspective, there may be an argument to think about mutual funds," he said. Technically, tracking error measures the amount by which an ETF's returns are likely to fluctuate above or below the performance of the index it tracks. But in the real world, the term is used more loosely to describe the actual gap between an ETF's r
basking in the glow of a spike in crude prices to their highest levels in two-and-a-half years, but potential investors need to slap http://www.marketwatch.com/amp/story/guid/5955D312-5BD3-11E0-9F0E-00212804637C on a pair of sunglasses and take a good look at http://www.investopedia.com/articles/exchangetradedfunds/09/tracking-error-etf-funds.asp the risks to avoid getting burned. Overall, the oil market is already well-known in the commodities world for its fast-paced and volatile environment. There’s a lesson to be learned there. “The price of oil can hinge on a number of factors: the political climate in the tracking error Middle East and North Africa, a natural disaster, such as a hurricane or earthquake, or the dollar’s motions in the course of a single day,” said Tom Lydon, president of Global Trends Investments and editor of ETF Trends. “One wrong move and the price of oil can swing by double digits.” “Playing energy requires knowing what you’re getting etf tracking error into and making sure you’re comfortable with the potential pitfalls,” he said. “You need to have time to monitor what you’re holding and be prepared to act when necessary.” And that advice certainly comes in handy for those considering investment in oil ETFs. “While these products arguably allow for a more convenient and cost-effective manner in which to access the oil market, they come with their own set of pros and cons that need to be fully understood before considering an investment in such a product,” said Kevin Mahn, chief investment officer and portfolio manager at SmartTrust Unit Investment Trusts. ETFs that invest in crude futures have fared well year to date, but not as well as crude futures. Year to date, the United States Oil Fund USO+0.55% has scored a gain of 9.2%, PowerShares DB Oil Fund DBO+0.57% is up 14.3% and the Teucrium Crude Oil Fund CRUD+0.08% has climbed about 4.9% since its launch in late February. Track ETF performance on Morningstar. That all compares to a mo
Center Retirement Personal Finance Trading Q3 Special Report Small Business Back to School Reference Dictionary Term Of The Day Applicable Federal Rate - AFR Rates published monthly by the IRS for federal income tax purposes. These rates are ... Read More » Latest Videos Why Create a Financial Plan? John McAfee on the IoT & Secure Smartphones Guides Stock Basics Economics Basics Options Basics Exam Prep Series 7 Exam CFA Level 1 Series 65 Exam Simulator Stock Simulator Trade with a starting balance of $100,000 and zero risk! FX Trader Trade the Forex market risk free using our free Forex trading simulator. Advisor Insights Newsletters Site Log In Advisor Insights Log In ETF Tracking Errors: Protect Your Returns By Eric Fontinelle Although rarely considered by the average investor, tracking errors can have an unexpected material effect on an investor's returns. It is important to investigate this aspect of any ETF index fund before investing. The goal of an ETF index fund is to track a specific market index, often referred to as the fund's target index. The difference between the returns of the index fund and the target index is known as a fund's tracking error. Most of the time, the tracking error of an index fund is small, perhaps only a few tenths of one percent. However, a variety of factors can sometimes conspire to open a gap of several percentage points between the index fund and its target index. In order to avoid such an unwelcome surprise, index investors should understand how these gaps may develop. SEE: Investopedia Special Feature: Exchange Traded Funds What Causes Tracking Errors?Running an ETF index fund might seem like a simple job, but it can actually be quite difficult. ETF index fund managers often employ complex strategies in order to track their target index in real time, with fewer costs and greater accuracy than their competitors. Many market i