scholarly journals ETFS – performance, tracking errors and their determinants in Europe and the USA

2019 ◽  
Vol 9 (4) ◽  
pp. 67-76
Author(s):  
George Tsalikis ◽  
Simeon Papadopoulos
Keyword(s):  
Tracking Error ◽  
Exchange Traded Funds ◽  
Tracking Errors ◽  
Performance Tracking ◽  
Tracking Ability ◽  
The Usa ◽  
Fund Size

Exchange-traded funds (ETFs) have grown considerably since their first introduction two and a half decades ago, becoming one of the most popular passive investment vehicles among retail and professional investors. However, their tracking ability is often questioned. In this paper we estimate tracking errors from a sample of 15 American and European ETFs utilizing three different methods. We find that American ETFs seem to exhibit lower tracking errors than European ETFs in all measurements of tracking error. We also analyse and discuss the factors that influence tracking error. Fund size and expense ratios are found to be affecting the tracking ability of ETFs. The results of this study concerning the performance and tracking error determinants of ETFs are consistent with the evidence presented in the literature. To our knowledge, this is the first study to compare American and European ETFs in terms of their tracking ability and their tracking error determinants.

scholarly journals Tracking Errors of Exchange Traded Funds in Bursa Malaysia

2019 ◽  
Vol 11 (2) ◽  
pp. 96
Author(s):  
Alfred Ing-Soon Ku ◽  
Venus Khim-Sen Liew ◽  
Chin-Hong Puah
Keyword(s):  
Tracking Error ◽  
Exchange Traded Funds ◽  
Tracking Errors ◽  
Retail Investors ◽  
Follow Up Studies ◽  
Tracking Ability ◽  
Selection Of

This study measures the tracking errors of exchange traded funds (ETFs) listed in Bursa Malaysia. Five measures of tracking errors are estimated in this study for the seven ETFs involved. Overall, the best ETF is METFAPA with the least tracking error. The ranking of the remainder ETFs, in the ascending order of tracking error is MYETFID, METFSID, MYETFDJ, CIMC50, FBMKLCI-EA and CIMBA40 (highest tracking error). The findings in this study is expected to provide clue for passive institutional and retail investors on their selection of ETFs to mimic the portfolio of the desired underlying assets. Moreover, it is anticipated that these findings will motivate the improvement in the tracking ability of the existing ETFs, solicit more follow up studies to encourage the development of new ETFs and increase the participation of investors.

Tracking Errors and Their Determinants

2021 ◽  
Vol 15 (1) ◽  
Author(s):  
Patrick Kuok Kun Chu ◽  
Dan Xu
Keyword(s):  
Fixed Effects ◽  
Economies Of Scale ◽  
Stock Exchange ◽  
Tracking Error ◽  
Market Risk ◽  
Exchange Traded Funds ◽  
Tracking Errors ◽  
Tracking Ability ◽  
Trading Volumes ◽  
The Impact

The purposes of this study are to compare the tracking error between 53 sampled physical and 15 over-the-counter (OTC) swap-type exchange-traded funds (ETFs) on the Tokyo Stock Exchange, and to contribute to a better understanding of the impact of selected determinants on the daily tracking error. The sample synthetic ETFs are found having higher tracking error than the sampled physical ETFs. The synthetic-type ETF managers may be difficult in using derivatives to replicate the benchmark performance. A panel regression model with cross-section fixed effects indicates the tracking error of the sampled physical ETFs is negatively related to size but positively related to expense ratio, dividend yield, trading volumes, market risk, and number of constituents in the target indexes. The results conform with the hypotheses that the expense, delay in receiving dividends, the trading cost and the market risk may erode the tracking ability; on the other hand, the economies of scale will improve the tracking ability. This study may help to raise a broader discussion of potential tracking error determinants and to provide some new insights.

An Evaluation of the Tracking Performance of Exchange Traded Funds (ETFs): The Case of Indian Index ETFs

2021 ◽  
pp. 097226292199648
Author(s):  
Vanita Tripathi ◽  
Aakanksha Sethi
Keyword(s):  
Tracking Performance ◽  
Capital Asset Pricing ◽  
Exchange Traded Funds ◽  
Tracking Errors ◽  
Vector Error Correction ◽  
Vector Error ◽  
Long Run ◽  
Asset Value ◽  
Tracking Ability ◽  
The Usa

The present study investigates how efficiently India-domiciled exchange traded funds (ETFs) replicate the returns of their underlying indices and analyses the factors that determine the tracking performance. We use a three-pronged approach involving Capital Asset Pricing Model (CAPM) regression, cointegration-Vector Error Correction Model methodology and tracking errors (TEs) to assess tracking efficiency. Random-effects panel regression is employed to evaluate how fund-specific factors influence tracking ability. We find that ETFs carry significantly lower exposure towards their indices than what their objective would suggest. Long-run linkages with benchmarks exist for most ETFs, but the price deviations from the indices are fairly persistent. The TEs for the majority of the funds are large and non-trivial. Bid-ask spreads, price-net asset value deviations, fund’s age and, to some extent, its size are the primary factors that influence tracking performance. ETFs in developed markets such as the USA and Europe have been found to exhibit superior benchmarking abilities. The study is expected to assist investors in developing a more efficient ETF portfolio and to help fund providers improve the quality of their offerings.

On the ability of New Zealand actively managed funds to generate outperformance in their domestic equity allocations

2018 ◽  
Vol 30 (4) ◽  
pp. 463-481 ◽  
Author(s):  
Bart Frijns ◽  
Ivan Indriawan
Keyword(s):  
New Zealand ◽  
Stock Returns ◽  
Tracking Error ◽  
Tracking Errors ◽  
Content Type ◽  
Portfolio Holdings ◽  
Market Index ◽  
Stock Picking ◽  
Fund Size ◽  
Managed Funds

Purpose This paper aims to assess the ability of New Zealand (NZ) actively managed funds to generate risk-adjusted outperformance using portfolio holdings data. Focusing on domestic equity allocations addresses the benchmark selection issue, particularly for funds with national and international exposures. Design/methodology/approach The authors assess performance using several asset pricing models including the CAPM, three-factor and four-factor models. The authors also assess performance across funds with different characteristics such as fund size, size of local holdings, type of fund provider, past returns and fees. The authors further examine whether funds engage in any stock-picking or market timing by considering the active share and tracking error. Findings The returns on NZ equity holdings of NZ actively managed funds from 2010 to 2017 provide little evidence of risk-adjusted outperformance and stock-picking skill. These exposures yield pre-cost returns that have a nearly perfect correlation with the market index and an insignificant alpha. Funds show little tendency to bet on any of the main characteristics known to predict stock returns, such as size, book-to-market and momentum. In addition, the authors show that the average active shares and tracking errors are low, suggesting that the majority of funds hold NZ equity portfolios that closely mimic the market index. Originality/value Existing studies rely on returns data which aggregate performance across all asset classes with varying exposures. This may lead to benchmark selection issues (particularly for funds with international exposures) which may obscure the fund manager’s true stock-picking skills. Assessment using holdings data would enable suitable performance measurement by researchers and industry analysts.

Tracking Efficiency of Exchange Traded Funds (ETFs)

Paradigm ◽  
2016 ◽  
Vol 20 (2) ◽  
pp. 176-190 ◽  
Author(s):  
Jaspal Singh ◽  
Prabhdeep Kaur
Keyword(s):  
Regression Analysis ◽  
Present Article ◽  
Mutual Fund ◽  
Negative Impact ◽  
Tracking Error ◽  
Evaluation Criteria ◽  
Panel Regression ◽  
Exchange Traded Funds ◽  
Tracking Ability ◽  
Managed Funds

Exchange traded funds (ETFs) have emerged as a new investment vehicle in the mutual fund industry providing investors with the ability to trade the entire market through a single transaction executed at the exchange. Using a sample of 12 equity ETFs from 1 April 2011 to 31 March 2015, the present article attempts to examine the performance efficiency of ETFs in India and explore factors that drive the performance of ETFs away from their target indices. The study reveals that ETFs exhibit significant tracking error while trying to replicate the returns of their benchmark indices. The results of panel regression analysis further reveal that the assets under management and volume positively affected the tracking ability of ETFs whereas volatility is reported to have negative impact on the tracking efficiency of ETFs. The results will have important implications for investors, managers as well as for the evaluation criteria involved in assessing the performance of actively managed funds.

Determinants of tracking error in German ETFs – the role of market liquidity

2016 ◽  
Vol 42 (5) ◽  
pp. 417-437 ◽  
Author(s):  
Friedrich Osterhoff ◽  
Christoph Kaserer
Keyword(s):  
Fixed Effects ◽  
Tracking Error ◽  
Market Liquidity ◽  
Special Focus ◽  
Exchange Traded Funds ◽  
Content Type ◽  
Tracking Ability ◽  
Liquidity Cost ◽  
Underlying Stocks ◽  
The Impact

Purpose – The purpose of this paper is to contribute to a better understanding of the impact of market liquidity on the daily tracking error of exchange-traded funds (ETFs). It puts a special focus on the liquidity cost of individual underlying stocks as well as the process of creation/redemption of ETF shares as key determinants of tracking ability. Design/methodology/approach – The study is based on daily observations of fund data for eight fully replicating German equity ETFs for July 2001-October 2013. A regression model with fund fixed effects is chosen to determine the effect of liquidity cost, creation/redemption and other control variables on daily tracking error. Data were compiled from issuer websites and Datastream. Proprietary XETRA Liquidity Measure, which was used as proxy for liquidity cost was supplied by Deutsche Börse. Findings – The study finds daily tracking error to significantly depend on the liquidity of underlying stocks. This finding emerges even though the ETFs in this study predominantly use in-kind creation/redemption. Even after controlling for creation/redemption, the liquidity impact remains basically unchanged. One reason might be imperfect replication of index weights: Either the in-kind-basket delivered in the course of creation/redemption does not perfectly match the benchmark-weights or the internal rebalancing of weights causes liquidity cost. Originality/value – To the best of the authors’ knowledge, this is the first paper that uses a specific liquidity measure for each single stock underlying an ETF. The findings extend the literature by corroborating the view that liquidity of individual stocks in the underlying portfolio has an impact on tracking error.

Investigating the Dynamics of Exchange Traded Funds Across the Bear and Bull Markets: Evidence from Indian Equity ETFs

2021 ◽  
pp. 097226292110075
Author(s):  
Prabhdeep Kaur ◽  
Jaspal Singh ◽  
Sidharath Seth
Keyword(s):  
Tracking Error ◽  
Excess Return ◽  
Risk Exposure ◽  
Exchange Traded Funds ◽  
Market Conditions ◽  
Bull Markets ◽  
Tracking Ability ◽  
Market Regime ◽  
Market Regimes ◽  
Insight Into

The present study attempts to examine the tracking ability of Indian equity exchange traded funds (ETFs) across the bearish and bullish market regimes. Also, ETFs’ sensitivity to their respective underlying indices across the two market conditions is examined so as to gain an insight into the differences in risk exposure under the two regimes using DBM. The results found that the tracking error (TE) of ETFs varies across the two market regimes with it higher during the bullish regime. At the same time, ETFs’ responsiveness to their underlying indices is found to be higher during the bearish market regime, which justifies the existence of lower TE during the bearish regime. NIFTYBEES, KOTAKNIFTY and BANKBEES emerged to be the top three performers in terms of tracking efficiency. Further, NIFTYBEES, BANKBEES and JUNIORBEES are reported to provide significantly positive excess returns during the bullish regime. As such, investors considering investment in equity ETFs can opt for the top performing funds where they also stand a chance to earn excess return (in few cases). Also, it is observed the beta coefficients of ETFs varied significantly from unity. It suggests that the ETFs and their respective underlying indices are not subject to similar systematic risk.

scholarly journals Institutional Constraints on the Rate of Derivatives in Leveraged Exchange-Traded Fund

2020 ◽  
Vol 49 (2) ◽  
pp. 217-248
Author(s):  
Dowan Kim
Keyword(s):  
Tracking Error ◽  
Institutional Constraints ◽  
Exchange Traded Funds ◽  
Tracking Errors ◽  
Data Set ◽  
Asset Value ◽  
Net Asset Value ◽  
Institutional Constraint ◽  
Exchange Traded Fund ◽  
Leveraged Etf

This study confirmed whether the rate of derivatives in leveraged exchange-traded funds (ETF) calculated by derivatives and net asset value (NAV) affect their tracking errors. This research established three findings. First, when the rate of derivatives was limited at 100%, the tracking error of the leveraged ETF targeted on 2 times of the index was affected by the rate of derivatives. Second, when the rate of derivatives was eased to 200%, the same-day tracking error of the leveraged ETF targeted on 2 times of the futures index that launched after the constraints was affected by the rate of derivatives. Third, this study analyzed the constraints of the rate of derivatives after determining whether the leveraged ETF targeted on 2 times of the index indicates whether the rate of derivatives is close to 200%. As a result, even when the rate of derivatives is slightly over the 200% limit, the tracking error was lower. Even when the constraints were slightly over the limit, the tracking error was shown to be significantly lower than the other data set. This result implies that when there is an institutional constraint on the rate of derivatives, there can be limitations to fund management of leveraged ETF targeted on 2 times of the futures index.

scholarly journals Tracking errors and their determinants: Evidence from Hong Kong exchange traded funds

2016 ◽  
Author(s):  
Patrick Kuok-Kun Chu
Keyword(s):  
Hong Kong ◽  
Panel Data ◽  
Stock Market ◽  
Negative Impact ◽  
Tracking Error ◽  
Exchange Traded Funds ◽  
Dividend Yield ◽  
Tracking Errors ◽  
Expense Ratio ◽  
Trading Volumes

This paper uses panel data to find the determinants of tracking errors in exchange traded funds (ETFs) in the Hong Kong stock market. A comparison of tracking errors between physical and synthetic ETFs also indicates that the synthetic ETFs have higher tracking errors. The magnitude of tracking errors is found to be negatively related to size but positively related to dividend yield, trading volumes of funds, and market risk. However, this study also finds that expense ratio has a negative impact on tracking error, which is not consistent with previous studies, and which this paper addresses.

Do Market Conditions Affect the Tracking Efficiency of Exchange-traded Funds? Evidence from Developed and Emerging Markets

2021 ◽  
pp. 097215092110367
Author(s):  
Augusto Ferreira da Costa Neto ◽  
Marcelo Cabús Klötzle ◽  
Antonio Carlos Figueiredo Pinto
Keyword(s):  
Emerging Markets ◽  
Tracking Error ◽  
Exchange Traded Funds ◽  
Market Conditions ◽  
Developed Markets ◽  
Tracking Ability

This study examines the tracking efficiency of a sample of exchange-traded funds (ETFs) from seven different emerging and developed markets, in bullish and bearish market conditions, using the data from daily closing prices. It seeks to address two major questions. First, do ETFs from both developed and emerging markets have the same behaviour regarding tracking their underlying indexes? Second, is ETFs tracking ability affected by events that could change market conditions from a bullish to a bearish pattern, and vice-versa? Our findings suggest that tracking error appears to be higher in emerging markets when compared to developed markets. Furthermore, tracking error was found to be relatively higher in bearish conditions for developed markets, while this was quite the opposite in emerging markets.

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