ETF Mythbuster: Tracking Down the Truth

Abstract

The rising popularity of ETFs as short-term trading tools as well as longer-term investment vehicles has brought increased attention to how they perform. Tracking error is a one of the most common measures of how well index funds (and ETFs) perform. But tracking error is often misused by the media and investors when referring to ETF performance. In this article, the authors clarify some of the most common misconceptions regarding ETF performance. They also show that relative performance is, in general, far better than tracking error calculations might imply.

TOPICS: Exchange-traded funds and applications, passive strategies, portfolio theory