Running An Index ETF Is Harder Than It Looks

April 28, 2017

Tracking Difference & Liquidity

In general, tracking difference will be very tight in big, liquid markets (it varies by just a basis point or two for the big S&P 500 funds), and will vary quite a lot in small, illiquid markets (frontier market ETFs can swing from a percent or two up or down). But when comparing apples to apples, tracking difference remains the best indicator of how well the manager is doing their job.

So how about GDXJ, where we had all these concerns about how it had to deviate from its index to avoid the Canadian regulatory bogeyman?

 

 

That’s a clean report card. In a median holding period, the fund has done 40 basis points better than the expense ratio would suggest. The “swinginess” (as good as +1.07% and as bad as -1.3%) is completely in line with an international small-cap ETF, which is exactly what this fund is.

The reality here is this: Running index funds isn’t as simple as it seems, and the scorecard across the industry is pretty stellar. How good is the average ETF manager? Do your homework, for sure, but the answer is mostly “very good indeed.”

At the time of writing, the author owned none of the securities mentioned. You can reach Dave Nadig at [email protected].

 

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