In my previous post, I looked at the tracking errors on iShares ETFs in 2009. In this edition, we’ll look at how Claymore’s ETFs tracked their indexes last year.
Tracking error is the amount by which the fund’s actual return trails (or exceeds) the return of the index. This information is reported in the fund’s annual Management Report of Fund Performance, which you can download from SEDAR. Just follow this link, type the fund company’s name in the search box, then choose “Management Report of Fund Performance” from the pull-down menu.
In Claymore’s reports, look for the heading “Results of Operations,” which is followed by a paragraph like this:
For the one year period ended December 31, 2009, the ETF’s common class units generated a total return of 10% on a NAV basis, representing a change in NAV per unit to $11 on December 31, 2009 from $10 on December 31, 2008… For the same period, the Index returned 11%.
In the above example, where the fund returned 10% and its index returned 11%, the tracking error is 1%. You should expect an index fund or ETF to trail its benchmark by the amount of its MER, but not much more.
I looked at the reports for several of Claymore’s popular ETFs and calculated their tracking error to see how they stacked up:
| Index | Fund | Tracking | |||
| return | return | MER | error | ||
| Canadian Fundamental | CRQ | 45.0% | 44.3% | 0.60% | -0.70% |
| US Fundamental (hedged) | CLU | 38.2% | 28.5% | 0.62% | -9.67% |
| International Fundamental | CIE | 22.3% | 16.0% | 0.62% | -6.33% |
| Japan Fundamental (hedged) | CJP | 10.4% | 2.0% | 0.65% | -8.45% |
| BRIC | CBQ | 86.0% | 75.0% | 0.66% | -11.01% |
| Global Monthly Dividend | CYH | 49.1% | 43.8% | 0.63% | -5.24% |
| Global Real Estate | CGR | 14.6% | 11.8% | 0.72% | -2.77% |
| 1-5 Yr Laddered Gov’t Bond | CLF | 2.7% | 2.1% | 0.17% | -0.54% |
| Canadian Preferred Share | CPD | 27.0% | 26.2% | 0.48% | -0.76% |
| Balanced Growth CorePortfolio | CBN | 21.8% | 22.3% | 0.70% | 0.57% |
| Balanced Income CorePortfolio | CBD | 24.1% | 23.5% | 0.70% | -0.59% |
First the good news: Claymore’s US Fundamental ETF (CLU) outperformed iShares’ Canadian S&P 500 Index Fund (XSP) by a wide margin, while the BRIC ETF, which invests largely in Brazil and China, had a dizzying 76% return. However, you’ll also notice that the tracking errors on all of the international equity ETFs are absolutely enormous.
Despite some excellent returns, these large tracking errors are a concern. I have a call into Claymore to ask for an explanation: I’ve come to appreciate that one-year tracking errors in international funds are sometimes caused by short-term volatility that gets magnified by the time difference between North America, Europe and Asia. It often disappears over the long term and doesn’t necessarily indicate a poorly managed fund. Stay tuned for more on this topic.
A few other notes:
- Claymore’s Canadian Fundamental ETF (CRQ) continues to be a stellar performer. Not only did it track its index tightly, it returned almost 10 percentage points more than S&P/TSX Composite.
- I did not include Claymore’s popular 1-5 Year Laddered Corporate Bond ETF (CBO), because it launched in 2009 and there isn’t a full year of data available.
- I also left out their excellent Canadian Dividend ETF (CDZ), because the index benchmark changed during 2009.
{ 5 comments… read them below or add one }
Thanks for the update!
Just missing CYH. Looks like the index was 49.05% last year and the ETF was 43.81 % (minus 0.6 MER). Correct me if I’m wrong, so that’s a -4.64% tracking error.
Jon: I’ve now added CYH in the list. Note that the tracking error includes the MER, it’s just the part that investors should expect. Note also that 0.6% in the management fee, but the actual MER is a bit higher. See this post for more:
http://canadiancouchpotato.com/2010/02/23/unpacking-etf-fees-part-2-claymore/
Dan, you mentioned short term volatility. How long would it take for the tracking error to normalize for a well managed fund?
I’ve noticed that the tracking error in TD e-series funds for the past year also have a high tracking error. Do index funds usually have higher tracking error than ETF’s?
Brian: Over three or four years, any anomalies should start to smooth out. Unfortunately, only iShares has a tracking error tool on its website that allows you to easily check over a period longer than one year.
There’s no reason why index mutual funds should have higher tracking errors than ETFs. I think that 2009 was an exceptional year for all funds and ETFs tracking international indexes, especially those that used currency hedging: almost all of them seem to have big tracking errors.
I’m still looking into this and hope to have some insight to share soon.
Excellent research, THANK YOU!