The early attraction of S&P index funds: is perfect tracking performance an illusion?

Abstract

2012),"On the dynamics of tracking indices by exchange traded funds in the presence of high volatility", Managerial Finance, Vol. 38 Iss 9 pp. 804-832 http://dx.If you would like to write for this, or any other Emerald publication, then please use our Emerald for Authors service information about how to choose which publication to write for and submission guidelines are available for all. Please visit www.emeraldinsight.com/authors for more information. About Emerald www.emeraldinsight.comEmerald is a global publisher linking research and practice to the benefit of society. The company manages a portfolio of more than 290 journals and over 2,350 books and book series volumes, as well as providing an extensive range of online products and additional customer resources and services.Emerald is both COUNTER 4 and TRANSFER compliant. The organization is a partner of the Committee on Publication Ethics (COPE) and also works with Portico and the LOCKSS initiative for digital archive preservation. AbstractThe enormous popularity of index funds is partly founded on the belief that they replicate the corresponding indexes. Prior studies based on monthly returns indicate that index funds very closely track the corresponding indexes. This study examines the tracking performance of a dominant set of index funds, those designed to track the S&P 500, using daily return data for the early years of fund popularity. Findings indicate that a naïve measure of tracking performance (fund R-square) applied to daily returns is considerably below the widely published tracking performance measures based on monthly returns. Results also find that higher R-square values are associated with larger fund size and longer fund manager tenure.

Tracking errors and their determinants: Evidence from Hong Kong exchange traded funds

“…These results once again demonstrate the difference in measuring the tracking errors of ETFs using daily versus monthly return figures. A fairer comparison is with the daily tracking errors employing the R-square of S&P 500 index funds documented in Cresson, Cudd, and Lipscomb (2002), which found values ranging from 0.9052 to 0.9609. However, the values of the R-square documented in this study are still substantially below those documented in the U.S. and Australia.…”

European Bond ETFs: Tracking Errors and the Sovereign Debt Crisis

“…Previous literature has used the following OLS regression of ETF returns on index returns as a measure of tracking performance (see Pope and Yadav, ; Cresson et al ., ; Rompotis, ): Here r p is the return on the ETF, r b is the return on the relevant index, and is the error term. The standard error of the above regression is another measure of tracking error (TE3).…”

“…Previous literature has used the following OLS regression of ETF returns on index returns as a measure of tracking performance (see Pope and Yadav, 1994;Cresson et al, 25 Edhec's recent survey of European ETF investors found that 73% of investors use TE1 as a measure of tracking performance while 44% assess the tracking performance based on correlation of the two assets and only 6% use metric based on cointegration. Other mentioned measures were simple comparison of mean returns (used by 23% investors) and asymmetric tracking error (used by 9% investors) (see Edhec, 2009).…”

“…27 Cresson et al (2002) suggest R 2 from equation 3 as another, more straightforward, measure of tracking performance. 28 For exceptions, when TE2 and TE3 may give inconsistent rankings, see Blume and Edelen (2004), Gastineau (2004) and Pope and Yadav (1994).…”

“…Cresson et al . () suggest R 2 from equation 3 as another, more straightforward, measure of tracking performance.…”