Tracking difference and tracking error of passive ETFs
All SFC-authorised passive ETFs have to disclose their tracking differences and tracking errors for transparency purpose as this helps to provide further information to investors concerning the performance of passive ETFs.
Investors can find out the information of tracking difference in a passive ETF’s Product Key Facts Statement (KFS) and on the passive ETF’s website. Tracking error will only be disclosed on the website.
Investors can use tracking difference and tracking error of a passive ETF as part of the reference data in choosing passive ETFs and find out the one that best tracks the underlying index.
In general, the closer to zero for both indicators, the better a passive ETF has tracked its underlying index. Investors have to note however that both the tracking difference and tracking error do not reflect the investment return of a passive ETF.
Tracking difference is the return difference between a passive ETF and its underlying index over a certain period of time. It measures the difference of change in net asset value of passive ETF and change in underlying index.
Investors have to note that the closer the value of tracking difference is to zero, the better the passive ETF is in tracking the underlying index.
The tracking difference may be in a negative term where a passive ETF has underperformed the underlying index over the period due to the fees and expenses incurred by the passive ETF. On the other hand, a tracking difference in positive term indicates that a passive ETF has outperformed the underlying index.
For a passive 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 a passive ETF tracks its underlying index 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 a passive ETF and its underlying index.
A lower annual tracking error indicates that a passive ETF has been tracking its underlying index consistently in a given year.
Unlisted index fund
In addition, all SFC-authorised unlisted index funds have to disclose their tracking differences in the KFS (note). Investors can make use of the tracking difference as discussed above to assess how well an unlisted index fund tracks its underlying index.
For questions regarding particular ETFs, investors are advised to contact the fund managers and their intermediaries for assistance.
(Note) Managers managing unlisted index funds/passive ETFs with listed and unlisted classes should ensure that investors of both classes are treated fairly in terms of information disclosed.