Tracking Errors on Canadian ETFs

By Dan Bortolotti on April 26, 2011
Estimated reading time: 4 minutes

An index fund’s tracking error is the difference between the return of the fund and the return of its benchmark index. It’s an important measure of how well your index funds are performing, and it’s worth keeping an eye on. The table below shows the tracking error of Canadian equity ETFs and index funds in [...]

As with many things in investing, raw numbers don’t tell the whole story. Here’s some guidance to help you understand the figures:

I’ve grouped the funds using some broad categories, but they don’t all track the same indexes, so it may be misleading to compare their absolute returns. The point here is to look at how well each fund tracked its own benchmark, not necessarily to compare funds that use different strategies within the same asset class.

When a fund has an unusually large tracking error, there may be a specific reason, such as change to the index during the year. If you’re alarmed by the performance of one of your ETFs or index funds, look in the Management Report of Fund Performance (available from the SEDAR website). You may find an explanation under the heading “Recent Developments.”

Funds report their returns in different ways. iShares, Horizons and BMO report ETF returns according to changes in net asset value (NAV), while Claymore reports them according to both NAV and market price. In order to make the comparisons fair, the returns below are all based on NAV.

Some funds report their returns to two decimal places, while others report only one. The figures below have been rounded off to one decimal place.

To further help put these numbers in context, I have included several footnotes below the table.

		Fund	Index	Tracking
Broad Market	Ticker	return	return	error
iShares S&P/TSX Capped Composite	XIC	17.3%	17.6%	-0.4%
TD Canadian Index – e-Series	TDB900	17.2%	17.6%	-0.4%
RBC Canadian Index	RBF556	16.8%	17.6%	-0.8%

Large Cap
iShares S&P/TSX 60	XIU	13.6%	13.8%	-0.2%
Altamira Canadian Index	NBC814	13.1%	13.8%	-0.7%
BMO Dow Jones Canada Titans 60	ZCN	13.6%	13.9%	-0.2%
Claymore Canadian Fundamental	CRQ	13.7%	14.6%	-0.9%
Horizons S&P/TSX 60	HXT	9.3%	9.3%	0.0%	(1)

Small Cap
iShares S&P/TSX SmallCap	XCS	34.4%	35.1%	-0.7%

Dividend
iShares DJ Canada Select Dividend	XDV	12.8%	13.3%	-0.5%
Claymore S&P/TSX Cdn Dividend	CDZ	15.2%	17.8%	-2.6%	(2)
Claymore S&P/TSX Cdn Pref Share	CPD	6.6%	7.7%	-1.1%	(3)

Real Estate
iShares S&P/TSX Capped REIT	XRE	21.9%	22.6%	-0.7%
BMO Equal Weight REITs	ZRE	17.9%	18.8%	-0.8%	(4)

Notes:

1. The Horizons S&P/TSX 60 ETF (HXT) was launched on September 14, 2010, so this tracking error covers only three and a half months. However, the structure of HXT, which uses a swap to deliver the total return of the S&P/TSX 60 without paying distributions, should guarantee that the fund’s tracking error will not exceed its 0.08% MER.

2. CDZ outperformed XDV in 2010, but with a much larger tracking error. This is a good example of why you should look beyond absolute performance numbers when comparing ETFs. The index tracked by CDZ, which is based on dividend growth, may be harder to track than XDV’s more straightforward benchmark.

3. CPD’s return based on market price was 7.1% — some 50 basis points higher than its return based on net asset value. CDZ also returned almost half a point more on market price than on NAV. Both ETFs seem to have traded at a premium in 2010, probably because of the huge popularity of dividend funds.

4. BMO’s real estate ETF launched on May 19, 2010, so these returns should not be compared with those of its iShares counterpart.

1. The Horizons S&P/TSX 60 ETF (HXT) was launched on September 14, 2010, so this tracking error only covers three-and-a-half months. The structure of HXT, which uses a tax-friendly swap to deliver the total return of the S&P/TSX 60 without paying distributions, should guarantee that the fund’s tracking error will never exceed its 0.08% MER.

2. CDZ outperformed XDV in 2010, but with a much larger tracking error. This is a good example of why should look beyond absolute performance numbers when comparing ETFs. The index tracked by CDZ, which is based on dividend growth, appears to be harder to track than XDV’s more straightforward benchmark.

4. BMO’s real estate ETF launched on May 19, 2010, so these returns should not be compared with those of its iShares counterpart.