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Published: August 16, 2022 at 6:00 am
This is an index fund screener based on tracking error and returns difference wrt benchmarks (aka tracking difference). The screener will help a user evaluate how efficiently an index fund has tracked its underlying benchmark. It will also help a understand how tracking a midcap index or the Nifty 100, 500 is quite different from tracking the Sensex or the Nifty.
The index fund screener is a simple Excel file that can be opened in any spreadsheet utility. It has two sheets. (1) “Returns Index Funds”. This compares the trailing returns over the last 1,2,3,4,5,6,7,8 years of 40+ index funds and their corresponding benchmarks. The return difference (fund return minus index return) is listed. Actual return differences are more intuitive than tracking errors. (2) The tracking error of these 30+ index funds over the last 1,2,3,4,5,6,7,8 years is also provided.
The tracking error is simply the standard deviation of the fund minus index monthly return differences. The lower the tracking error, the more efficient the fund is in following the index. Unlike returns, tracking error data over multiple durations is hard to find. Also, many investors do not seem to appreciate that the tracking error is dependent on the duration. This screener hopes to change that.
We have already pointed out while selecting index funds, lower expenses do not mean lower tracking errors! With the TER of index funds starting to fluctuate, return differences are a better way to choose or track index funds.
Investors should not look for funds with the lowest tracking error or lowest return difference. That would be too narrow. Instead, they should focus on funds that figure consistently in the top 5 or even top 10 in low tracking error and/or return differences.
Cast a broad net and choose one. Monthly updates of this screener will tell you how the tracking error has worsened after a TER increase.
This is a screenshot of the file. The top and bottom panels represent the two sheets available.
The user will need to look for funds with a return difference greater than, say, -2% and less than 0%. This can be accomplished with the Excel filter shown below.
This is summarised in this video
What about ETFs? It is quite easy and tempting to compute the tracking error of ETFs with their NAV. However, this can be seriously misleading because their price and not NAV determine ETF returns.
So ETF tracking should be done with price data and not NAV. Everyone uses NAV for computing returns and tracking errors of ETFs, this is useless for the investor.
Our ETF tracker-based ETF price and ETF NAV is now available! The freefincal ETF tracking error screener.
Are you living outside India? You can pay via this Paypal link (3 USD) and send a mail to freefincal at Gmail.
Check out our active equity fund and debt fund + hybrid fund screeners!
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