Tracking Errors on Bond and Commodity ETFs

By Dan Bortolotti and Canadian Couch Potato on April 28, 2011
Estimated reading time: 3 minutes

The table below shows the tracking error of Canadian bond and commodity ETFs in 2010. To make sure you understand these numbers in their proper context, see my earlier post on tracking errors for Canadian equity ETFs. Fund Index Tracking Broad bond market Ticker return return error iShares DEX Universe Bond XBB 6.4% 6.7% -0.4% [...]

The table below shows the tracking error of Canadian bond and commodity ETFs in 2010.

To make sure you understand these numbers in their proper context, see my earlier post on tracking errors for Canadian equity ETFs.

		Fund	Index	Tracking
Broad bond market	Ticker	return	return	error
iShares DEX Universe Bond	XBB	6.4%	6.7%	-0.4%
TD Canadian Bond index – e-Series	TDB909	6.4%	6.7%	-0.3%
TD Canadian Bond index – I-Series	TDB966	6.0%	6.7%	-0.7%
BMO Aggregate Bond	ZAG	5.1%	5.4%	-0.2%
Claymore Advantaged Canadian Bond	CAB	5.2%	6.2%	-1.0%
iShares DEX Long Term Bond	XLB	12.1%	12.5%	-0.4%
iShares DEX Short Term Bond	XSB	3.2%	3.6%	-0.3%

Government bonds
iShares DEX All Government Bond	XGB	6.1%	6.5%	-0.5%
Claymore 1-5 Yr Laddered Gov’t Bond	CLF	3.3%	3.5%	-0.2%	(1)
BMO Short Provincial Bond	ZPS	3.5%	3.8%	-0.3%
BMO Short Federal Bond	ZFS	2.9%	3.2%	-0.3%
BMO Long Federal Bond	ZFL	5.7%	5.9%	-0.1%	(2)
BMO Emerging Markets Bond *	ZEF	8.5%	9.1%	-0.6%	(2)

Corporate bonds
iShares DEX All Corporate Bond	XCB	6.6%	7.3%	-0.8%
Claymore 1-5 Yr Laddered Corp Bond	CBO	3.8%	4.0%	-0.2%
BMO Short Corporate Bond	ZCS	3.9%	4.3%	-0.4%
BMO Mid Corporate Bond	ZCM	5.8%	6.1%	-0.3%	(2)
BMO Long Corporate Bond	ZLC	10.7%	11.5%	-0.8%	(2)

Real-return bonds
iShares DEX Real Return Bond	XRB	10.6%	11.1%	-0.5%
BMO Real Return Bond	ZRR	7.0%	7.2%	-0.2%	(2)

Commodities
Claymore Gold Bullion	CGL	26.6%	29.2%	-2.7%	(3)
Horizons BetaPro COMEX Gold	HUG	26.8%	28.6%	-1.8%
Horizons BetaPro COMEX Silver	HUZ	77.2%	81.6%	-4.4%	(4)
Horizons BetaPro NYMEX Crude Oil	HUC	4.8%	8.0%	-3.2%
Horizons BetaPro NYMEX Natural Gas	HUN	-37.6%	-36.3%	-1.3%
Claymore Natural Gas Commodity	GAS	-49.8%	-48.2%	-1.6%

Notes:

1. The 3.3% return of CLF is based on the fund’s net asset value (NAV). The return on market price was just 2.8% — a significant difference. With bonds so unpopular these days, the forces of supply and demand may have driven down the price of this fund.

2. Several of BMO’s bond ETFs launched in 2010, so these returns do not cover a full year.

3. CGL’s return based on market price was 29.12%, two and a half percentage points higher than its return based on NAV, and only eight basis points off the spot price of gold. Just as an aversion to bonds seems to have lowered CLF’s price, the continuing gold mania helped this ETF trade at a premium in 2010.

4. Silver was the big winner of 2010 and investors in the Horizons BetaPro COMEX Silver ETF would have been dancing in the streets with their 77% return. But the large tracking error here shows that precious metals ETFs using futures contracts (as opposed to those that hold gold or silver bullion) can carry significant frictional costs. They may not closely track the spot price of the commodity.

Postscript. Horizons ETFs sent me this response regarding HUZ: “The tracking error is primarily due to the fact that the silver futures contracts are priced in U.S. dollars and HUZ doesn’t hedge intraday currency fluctuations; HUZ rebalances the FX hedge at the end of the day. We believe this accounts for most of the 4% difference in the performance of the ETF versus the performance of its index. Please keep in mind that any ETF, whether it is physically backed or futures-backed, will likely be subject to this currency differentiation.”