This index fund screener is based on tracking error and return differences wrt benchmarks (also known as tracking differences). It will help users evaluate how efficiently an index fund has tracked its underlying benchmark. It will also help them understand how tracking a midcap index, such as the Nifty 100 or 500, differs from tracking the Sensex or the Nifty. There are now more than 150 index funds in the screener.
The index fund screener is a simple Excel file that can be opened using any spreadsheet utility. It has two sheets. (1) “Returns Index Funds”. This compares trailing returns for 40+ index funds over the last 1, 2, 3, 4, 5, 6, 7, and 8 years with their corresponding benchmarks. The return difference (fund return minus index return) is listed. Actual return differences are more intuitive than tracking errors. (2) The tracking error of these 30+ index funds over the last 1,2,3,4,5,6,7, and 8 years is also provided.
The tracking error is the standard deviation of the index fund’s monthly returns relative to the index. The lower the tracking error, the more efficiently the fund follows the index. Unlike returns, tracking-error data across multiple durations is hard to find. Also, many investors do not seem to appreciate that the tracking error depends on the duration. This screener hopes to change that.
We have already pointed out that lower expenses do not mean lower tracking errors while selecting index funds! With the TER of index funds starting to fluctuate, return differences are a better way to choose or track index funds.
How do I use the Index fund tracking error screener?
Investors should not look for funds with the lowest tracking error or the lowest return difference. That would be too narrow. Instead, they should focus on funds consistently in the top 5 or even the top 10 in low tracking error and/or return differences.
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Cast a broad net and choose one. Monthly updates on this screener will show how the tracking error worsened following a TER increase.
This is a screenshot of the file. The top and bottom panels represent the two sheets available.
- If this quantity is positive, then the fund has outperformed the benchmark! This is typically a red flag. I would avoid such funds.
- The tracking error is always positive; you can screen for the lowest value.
- The fund’s return minus the index return warrants attention. Some examples are given below.
| Fund | index | fund return minus index return | Notes |
| 0.80% | 1% | -0.20% | ok |
| -0.80% | -1% | 0.20% | not ok |
| -1.20% | -1% | -0.20% | ok |
| -3% | -1% | -2.00% | not ok |
The user must look for funds with a return difference greater than, say, -2% and less than 0%. This can be accomplished with the Excel filter shown below.
This is summarised in this video
What about ETFs? It is quite easy and tempting to compute ETF tracking error using their NAV. However, this can be seriously misleading because ETF returns are driven by price, not NAV.
ETF tracking should be based on price data, not NAV. Everyone uses NAV to compute returns and track ETF errors, but this is of no use to investors.
Our ETF tracker-based ETF price and ETF NAV are now available! The freefincal ETF tracking error screener.
Get the Index fund tracking error screener!
- This screener costs Rs. 200 and is meant for personal use only. The cost is only for the current month; the data is in the sheet.
- Inside, you get discounted links to our two courses: How to get people to pay for your skills (aka earn from skills) and the lectures on goal-based portfolio management.
- While freefincal will do its best to publish updated screener sheets each month, it cannot guarantee it.
- The file contains no buy or sell recommendations and only has the abovementioned data.
- Enough care and effort have been put into identifying and correcting errors. However, we cannot guarantee that the sheet is error-free.
- The buyer will have to research using the information in the spreadsheet. No recommendations or assistance are included in the sheet and will not be provided separately.
- We will not provide any further assistance with using the sheet.
- The purchased sheet is for personal use and should not be shared, whether privately or publicly.
Click here to pay Rs. 200 and download (instantly) the latest Freefincal Index Fund Tracking Error Screener.
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