Tracking error in an ETF : r/CFA - Reddit

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FAQs about Tracking error in an ETF : r/CFA - Reddit Coupon?

How do ETF companies offset tracking errors?

Some ETF companies may offset tracking errors through security lending, which is the practice of lending out holdings in the ETF portfolio to hedge funds for short selling. The lending fees collected from this practice can be used to lower tracking error if so desired. ...

Do ETF index funds track errors?

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 committing any money to it. The goal of an ETF index fund is to track a specific market index, often referred to as the fund's target index. ...

Do ETFs have tracking error?

Many components make up the total cost of ownership of an exchange-traded fund (ETF), including expense ratios, bid-ask spreads, and premiums and discounts. Tracking error tends to be overlooked, but because it impacts investment returns, it, too, is a cost. And it’s a central issue for all index funds, not just ETFs. ...

What is a high tracking error in ETFs?

High tracking error in ETFs does not inherently indicate poor performance; instead, it reflects how closely an ETF follows its benchmark index. A high tracking error may occur with actively managed ETFs, which sometimes deviate significantly from their benchmarks in pursuit of higher returns. ...

Are fixed income index ETFs more vulnerable to tracking error?

Because of this, fixed income index ETFs are more vulnerable to tracking error than equity index ETFs are, and there can often be larger-than-expected differences in returns between the fund and its benchmark and between products that cover the same segment of the market. ...

Does ETF illiquidity affect tracking error?

YES. The analyses conducted substantiate a causal link between illiquidity of the ETF, illiquidity of the underlying asset, and the consequent impact on tracking error. Specifically, the presence of illiquidity in the underlying basket magnifies the impact of ETF illiquidity on tracking error. ...