Causes Tracking Error Etfs
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Etf Sharpe Ratio
for assessing whether they’re getting what they pay for. As such, it’s one of the most important ETF statistics to consider. What Is Tracking Difference? The vast majority of ETFs aim to track an index—which means that ETFs try to deliver the same returns as a particular index. Tracking difference is the discrepancy between ETF performance and index performance. Tracking difference is rarely nil: The ETF usually trails its index. That’s because a number of factors prevent the ETF from perfectly mimicking its index. ETF returns don’t always trail their index though; tracking difference can be small or large, positive or negative. Tracking error is a related but distinct metric. Tracking error is about variability rather than performance. Math geeks measure variability through standard deviation. Tracking error is the annualized standard deviation of daily return differences between the total return performance of the fund and the total return performance of its underlying index. In laymen’s terms, tracking error basically looks at the volatility in the difference of performance between the fund and its index. So, what factors affect how well a fund tracks its index? Total Expense Ratio An ETF’s total expense ratio (TER) is the single best indicator of future tracking difference. If an ETF charges 1 percent to track an index, then all else equal, ETF returns ought to lag index returns by
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500 ETF Is Right For You? Sep 30 by Tom Lydon China A-Shares Still on MSCI's Radar Sep 30 by Tom Lydon How U.S. Voters Can Impact Latin America ETFs Sep 30 by Brenton Garen Related Outside Content The Best Options http://www.etftrends.com/2010/01/causes-tracking-error-in-etfs/ Trade for Constellation Brands (STZ) EarningsPatrick Anderson 09/30/2016 10:02PM UTCHere's What An Investment Bank CEO Told His Employees About InequalityRyan McQueeney 09/30/2016 8:52PM UTCQ3 Earnings Season PreviewSheraz Mian 09/30/2016 8:16PM UTCForeign Banks Stock Outlook - September 2016Kalyan Nandy 09/30/2016 8:08PM UTC The Causes of Tracking Error In ETFs January 29, 2010 at 3:00 pm by Tom Lydon Tracking errors, at least some minuscule discrepancies, are something that can be a necessary evil in exchange traded fund (ETFs). tracking error The errors were even more noticeable in volatile trading during the financial crisis. Tracking error is when a fund's performance veers from the benchmark index that it is supposed to reflect, writes Sam Mamudi for The Wall Street Journal. The problem is magnified for funds in smaller segments of the market, whose stock holdings are less liquid and, at times, more volatile than the broader market. [Tracking errors: what it is and how it happens.] ETFs etf tracking error that track the same benchmark also have varying results. For instance, the iShares MSCI Emerging Markets Index (NYSEArca: EEM) and the Vanguard Emerging Markets Stock (NYSEArca: VWO) both follow the MSCI Emerging Markets Index, but VWO gained about 76% while EEM increased around 72%. The index was up 78.5%. [Things that determine an ETF's performance.] One reason for the disparity is because of costs. VWO has a lower expense ratio and the savings are passed onto the investor as higher returns. Another reason is because of different fund management styles. For example, VWO tries to fully match the index, with more than 800 holdings, while EEM is more selective, with around 400 holdings. Differences in performance are also seen among similar ETFs that use different indexes. For example, small-cap growth ETFs have three main choices: the iShares S&P SmallCap 600 Growth (NYSEArca: IJT), SPDR Dow Jones Small Cap Growth (NYSEArca: DSG) and Vanguard Small Cap Growth ETF (NYSEArca: VBK). IJT, which follows the S&P Small Cap 600/Citigroup Growth Index, had a total return of 28.8% in 2009; DSG, which tracks the Dow Jones Small Cap Growth Total Stock Market Index, was up 47%; and VBK, which reflects the MSCI U.S. Small Cap Growth Index, increased 42%. For more information on ETFs, visit our ETF 101 category. Max Chen contributed to this article. The opinions and forecasts expressed h