Tracking difference and tracking error of ETFs
With effect from 4 January 2015, all SFC-authorised ETFs have to disclose their tracking differences and tracking errors with a view to improving transparency and helping provide further information to investors concerning the performance of ETFs.
Investors can find out the information of tracking difference in an ETF’s Product Key Facts Statement (KFS) and on the ETF’s website. Tracking error will only be disclosed on the website.
Investors can use tracking difference and tracking error of an ETF as part of the reference data in choosing ETFs and find out the one that best tracks the underlying index/benchmark.
In general, the closer to zero for both indicators, the better an ETF has tracked its underlying index/benchmark. Investors have to note however that both the tracking difference and tracking error do not reflect the investment return of an ETF.
Tracking difference is the return difference between an ETF and its underlying index/benchmark over a certain period of time. It measures the difference of change in net asset value of ETF and change in underlying index/benchmark.
Investors have to note that the closer the value of tracking difference is to zero, the better the ETF is in tracking the underlying index/benchmark.
The tracking difference may be in a negative term where an ETF has underperformed the underlying index/benchmark over the period due to the fees and expenses incurred by the ETF. On the other hand, a tracking difference in positive term indicates that an ETF has outperformed the underlying index/benchmark.
For an ETF which has been launched for more than a year, it is required to disclose its tracking error which is an indicator of the quality of replication. It measures how consistently an ETF tracks its underlying index/benchmark over a given period of time. It is also commonly referred to as the volatility (as measured by standard deviation) of the differences in returns between an ETF and its underlying index/benchmark.
A lower annual tracking error indicates that an ETF has been tracking its underlying index/benchmark consistently in a given year.
Unlisted index fund
In addition, with effect from 4 January 2015, all SFC-authorised unlisted index funds have to disclose their tracking differences in the KFS. Investors can make use of the tracking difference as discussed above to assess how well an unlisted index fund tracks its underlying index/benchmark.
For questions regarding particular ETFs, investors are advised to contact the fund managers and their intermediaries for assistance.