tag:blogger.com,1999:blog-5433839636644874439.post271208126574508645..comments2024-03-04T13:37:11.022+00:00Comments on Canadian Financial DIY: Some ETFs Don't Track Their Index Too WellCanadianInvestorhttp://www.blogger.com/profile/05645767559302303541noreply@blogger.comBlogger3125tag:blogger.com,1999:blog-5433839636644874439.post-38796052074171321652009-09-19T19:32:07.962+00:002009-09-19T19:32:07.962+00:00If an ETF is allowed to lend securities then shoul...If an ETF is allowed to lend securities then shouldn't it be possible for it to always beat it's own index?<br /><br />I don't see how over performing an index is considered negatively as a tracking error. I would much rather see a list of "Badly behaving" ETFs that focused on the more concerning problem of under performance.Jordanhttps://www.blogger.com/profile/14261191417363201262noreply@blogger.comtag:blogger.com,1999:blog-5433839636644874439.post-2795646131379550082009-09-19T17:28:02.634+00:002009-09-19T17:28:02.634+00:00Hi Preet, thanks for pointing that out. The gross ...Hi Preet, thanks for pointing that out. The gross absolute mretrun difference may indeed not be the best measure of ETF tracking quality. <br /><br />Found this article at IndexUniverse which compares the Vanguard Emerging Market ETF VWO with EEM. VWO appears to be superior in that analysis too.<br />http://www.indexuniverse.com/sections/features/5654-a-second-look-tracking-error-a-emerging-markets.htmlCanadianInvestorhttps://www.blogger.com/profile/05645767559302303541noreply@blogger.comtag:blogger.com,1999:blog-5433839636644874439.post-62355947440987614082009-09-19T15:55:46.348+00:002009-09-19T15:55:46.348+00:00Hi Jean, I think it's not so much of a surpris...Hi Jean, I think it's not so much of a surprise since the industry almost ubiquitously miscalculates tracking error (at least in its true sense).<br /><br />From what I've seen and experienced, analysts are actually looking at absolute excess returns and not tracking error. So a low returning asset class will have an advantage due to the relatively little volatility and lower returns. Whereas more volatile and higher returning asset classes are harder to track.<br /><br />For example if a bond index returns 1% and the ETF returns 0.5%, the absolute excess return is 0.5%, but is 50% on a relative basis.<br /><br />With an emerging markets index, if the index returned 50% but the ETF returned 49% the absolute excess return was 1% but on a relative bases was 98%.<br /><br />The emerging markets ETF would score poorly using the tracking error methodology that is normally used. But it is actually doing a better job of tracking.<br /><br />More accurate would be to calculate the average of the standard deviation of returns as a proportion of the overall return, no?<br /><br />If you did that, I bet you would find those Vanguard surprises would be quite tight in reality.WhereDoesAllMyMoneyGo.comhttps://www.blogger.com/profile/09185007666460707356noreply@blogger.com