ETF Dictionary

Understanding Tracking Error in ETF Investments

What Is an ETF? Firstly, let’s understand what an ETF is. An Exchange-Traded Fund (ETF) is a type of investment fund that is traded on stock exchanges, much like stocks. ETFs hold assets such as stocks, commodities, or bonds and are popular for their liquidity and low expense ratios with the aim to track the performance of a specific index or sector.

1. What Is Tracking Error?

Tracking Error is a measure that quantifies the difference between the performance of an ETF and its benchmark index. It’s expressed as a percentage and reflects how closely an ETF follows the index it aims to replicate. A low Tracking Error indicates that the ETF is closely mirroring the index’s performance, while a high Tracking Error suggests a significant deviation.

2. The Significance of Tracking Error

1. Assessing ETF Performance: Tracking Error provides insight into how effectively an ETF is replicating the performance of its benchmark index. A lower Tracking Error is often seen as a positive attribute because it means the ETF is achieving its goal of tracking the index closely.

2. Evaluating Fund Management: The magnitude of Tracking Error can also reflect the skill of the fund manager in executing the investment strategy. It shows how well the manager is selecting assets and managing the portfolio to align with the benchmark’s performance.

For example, if you’re investing in an ETF like the hypothetical “KIM Growth VNFINSELECT ETF,” which tracks the financial sector on the HSX, and it reports a Tracking Error of 0.56%, it indicates a minor deviation from the VNFINSELECT index. This suggests that the fund management is effectively implementing its investment strategy to meet the fund’s objectives.’

3. How to Find Tracking Error

To locate the Tracking Error of an ETF, investors can visit:

• The fund manager’s website: They often provide detailed performance metrics, including Tracking Error.
• Financial websites: Platforms like Bloomberg or Morningstar offer comprehensive data on ETFs, including their Tracking Error.
• Specialized ETF websites: such as KIS Prime ETF, sites focus solely on ETFs and are a great resource for detailed fund information,

4. Consider investing in ETF based on Tracking Error?

While Tracking Error is an important metric, it’s not the only factor to consider when investing in ETFs. Operational costs, management fees, risk profile, and your investment goals are equally crucial. A holistic approach, considering all these factors, will enable a more informed investment decision.

In conclusion, Tracking Error offers valuable insights into an ETF’s performance relative to its benchmark, highlighting efficiency and management effectiveness. However, it’s one piece of the puzzle in the broader context of investment strategy and portfolio management. Happy investing!

We hope this simple guide by KIS Vietnam has enhanced your understanding of Tracking Errors in ETFs. Wishing you successful and secure investments!