An index fund’s tracking error is the difference between the return of the fund and the return of its benchmark index. It’s an important measure of how well your index funds are performing, and it’s worth keeping an eye on. The table below shows the tracking error of Canadian equity ETFs and index funds in 2010.
As with many things in investing, raw numbers don’t tell the whole story. Here’s some guidance to help you understand the figures:
- I’ve grouped the funds using some broad categories, but they don’t all track the same indexes, so it may be misleading to compare their absolute returns. The point here is to look at how well each fund tracked its own benchmark, not necessarily to compare funds that use different strategies within the same asset class.
- When a fund has an unusually large tracking error, there may be a specific reason, such as change to the index during the year. If you’re alarmed by the performance of one of your ETFs or index funds, look in the Management Report of Fund Performance (available from the SEDAR website). You may find an explanation under the heading “Recent Developments.”
- Funds report their returns in different ways. iShares, Horizons and BMO report ETF returns according to changes in net asset value (NAV), while Claymore reports them according to both NAV and market price. In order to make the comparisons fair, the returns below are all based on NAV.
- Some funds report their returns to two decimal places, while others report only one. The figures below have been rounded off to one decimal place.
To further help put these numbers in context, I have included several footnotes below the table.
|iShares S&P/TSX Capped Composite||XIC||17.3%||17.6%||-0.4%|
|TD Canadian Index – e-Series||TDB900||17.2%||17.6%||-0.4%|
|RBC Canadian Index||RBF556||16.8%||17.6%||-0.8%|
|iShares S&P/TSX 60||XIU||13.6%||13.8%||-0.2%|
|Altamira Canadian Index||NBC814||13.1%||13.8%||-0.7%|
|BMO Dow Jones Canada Titans 60||ZCN||13.6%||13.9%||-0.2%|
|Claymore Canadian Fundamental||CRQ||13.7%||14.6%||-0.9%|
|Horizons S&P/TSX 60||HXT||9.3%||9.3%||0.0%||(1)|
|iShares S&P/TSX SmallCap||XCS||34.4%||35.1%||-0.7%|
|iShares DJ Canada Select Dividend||XDV||12.8%||13.3%||-0.5%|
|Claymore S&P/TSX Cdn Dividend||CDZ||15.2%||17.8%||-2.6%||(2)|
|Claymore S&P/TSX Cdn Pref Share||CPD||6.6%||7.7%||-1.1%||(3)|
|iShares S&P/TSX Capped REIT||XRE||21.9%||22.6%||-0.7%|
|BMO Equal Weight REITs||ZRE||17.9%||18.8%||-0.8%||(4)|
1. The Horizons S&P/TSX 60 ETF (HXT) was launched on September 14, 2010, so this tracking error covers only three and a half months. However, the structure of HXT, which uses a swap to deliver the total return of the S&P/TSX 60 without paying distributions, should guarantee that the fund’s tracking error will not exceed its 0.08% MER.
2. CDZ outperformed XDV in 2010, but with a much larger tracking error. This is a good example of why you should look beyond absolute performance numbers when comparing ETFs. The index tracked by CDZ, which is based on dividend growth, may be harder to track than XDV’s more straightforward benchmark.
3. CPD’s return based on market price was 7.1% — some 50 basis points higher than its return based on net asset value. CDZ also returned almost half a point more on market price than on NAV. Both ETFs seem to have traded at a premium in 2010, probably because of the huge popularity of dividend funds.