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:
|US Fundamental (hedged)||CLU||38.2%||28.5%||0.62%||-9.67%|
|Japan Fundamental (hedged)||CJP||10.4%||2.0%||0.65%||-8.45%|
|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.