From this month, we shall be publishing a tracking error report of index funds (ETFs to be added later). The data is available for free and will be presented in an intuitive, easy-to-understand format. This month, 34 index funds and one ETF (Nifty Bees) are part of the list.
We have now established the difficulties of measuring tracking error as a standard deviation and also how bad the tracking error can be if we use ETF price data (the only quantity that matters to retail investors) instead of ETF NAV data (widely used): How a market crash affects index funds: A better way to measure tracking error.
In this tracking error report, we present data for the last two years and the last three years. A screenshot is presented below.
Screenshot of the index fund tracking error datasheet
Max return difference The max return difference as defined above
Min return difference The min return difference
Return difference spread max-min. For a particular benchmark, we shall look for a spread less than 1% (marked in bold)
No of neg return differences no of times fund or ETF has outperformed the index (monthly returns)
Total no of return differences Total number of return-difference data points
% negative instances (no of neg return differences)/(Total no of return differences). For a particular benchmark, we shall look for less than 10% of such negative instances (marked in bold)
Index funds with the lowest tracking error (Nov 2020)
These Nifty funds have the lowest max to min spread and percentage of negative return differences (as defined above). Hdfc Sensex fund is also part of this list.
UTI Nifty Index Fund(G)-Direct Plan
HDFC Index Fund-NIFTY 50 Plan(G)-Direct Plan
SBI Nifty Index Fund(G)-Direct Plan
HDFC Index Fund-Sensex(G)-Direct Plan
The moment we step out of Nifty or Sensex the spreads become too big and we will have to relax our selection criterion. For example, Axis Nifty 100 has a spread that is about five times more than UTI Nifty fund and about four times more negative return difference instances. It is amusing to note that Motilal Oswal Nifty 500 fund has done a touch better than Axis Nifty 100 (see data in the sheet).
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Dr M. Pattabiraman (PhD) is the founder, managing editor and primary author of freefincal. He is an associate professor at the Indian Institute of Technology, Madras. He has over 13 years of experience publishing news analysis, research and financial product development. Connect with him via Twitter(X), LinkedIn, or YouTube. Pattabiraman has co-authored three print books: (1) You can be rich too with goal-based investing (CNBC TV18) for DIY investors. (2) Gamechanger for young earners. (3) Chinchu Gets a Superpower! for kids. He has also written seven other free e-books on various money management topics. He is a patron and co-founder of “Fee-only India,” an organisation promoting unbiased, commission-free, AUM-independent investment advice.
Published by CNBC TV18, this book is designed to help you ask the right questions and find the correct answers. Additionally, it comes with nine online calculators, allowing you to create custom solutions tailored to your lifestyle. Get it now.
This book is designed for young earners to get their basics right from the start! It will also help you travel to exotic places at a low cost! Get it or gift it to a young earner.
This is an in-depth exploration of vacation planning, including finding affordable flights, budget accommodations, and practical travel tips. It also examines the benefits of travelling slowly, both financially and psychologically, with links to relevant web pages and guidance at every step. Get the PDF for Rs 300 (instant download)