Tracking errors of MO S&P 500 Index fund, MO Nasdaq 100 ETF and FoF

Published: July 30, 2021 at 8:44 am

Last Updated on December 29, 2021 at 6:20 pm

In this article, we consider the tracking errors of Motilal Oswal S&P 500 Index Fund (MO-SP500), Motilal Oswal Nasdaq 100 ETF (MO-N100ETF) and Motilal Oswal Nasdaq 100 Fund of Fund (MO-N100FOF).

In a previous article, we saw that most international equity funds fail to beat the S&P 500 TR (INR). So the issue of tracking error becomes important for the passive funds tracking the S& P 500 and Nasdaq 100.

We shall measure the tracking error simply by the annualised return difference between the fund and its index and not by the standard deviation of monthly return differences between fund and index over a given period. The annualised return difference is a simple way to appreciate tracking errors.

Tracking error of Motilal Oswal S&P 500 Index Fund

Update: Senthil on Twitter pointed out the withholding tax on dividends for these funds which can cause a tracking error.  The AMC should then be using an appropriate net dividend tax index to benchmark the fund.

Join over 32,000 readers and get free money management solutions delivered to your inbox! Subscribe to get posts via email!
🔥Enjoy massive discounts on our robo-advisory tool & courses! 🔥

In the one year period ending 23rd July 2021, the S&P 500 Total Return in INR index moved up by 37.82% and the net return index (after accounting for tax) moved up by 37.18%. MO-SP500 only moved by up only by 32.5%. The return difference is about 9.5 times more than the direct plan expense ratio of 0.49%.

Is this because of directly trying to track 500 US stocks? The NASDAQ 100 (N100) Total Return in INR moved up by 43.2% for the same period. MO-N100ETF NAV moved up by 37.2% and ETF price by 37.1%.  This is a bigger deviation! MO-N100FOF moved up by 35.9%.


Such a large deviation from the index has cost MO-SP500 dearly. Only 3 out of 19 actively managed international mutual funds (directly or via an underlying fund) managed to be the S&P 500 index (study linked above), but 12 out 19 managed to beat the MO-SP500 fund. This does not make actively managed international funds more attractive. They are plagued with their own set of problems, as mentioned before in the same study.

One year is too short a time period to judge. Still, one cannot help but already wonder if Motilal Oswal’s decision to directly track the S&P 500 (or Nasdaq 100) instead of using a US-based ETF or index fund with low tracking error as an underlying fund is right or not. Only time will tell.

As astutely by Pranav Merchant, the performance of MO-N100FOF must be closely compared with that of Kotak Nasdaq 100 FOF. This has a lower TER and invests in overseas passive funds such as IShares Nasdaq-100 ETF, Lyxor Nasdaq-100 ETF and USAA NASDAQ-100 Index fund. If the underlying fund has a low tracking error, Kotak has eliminated the tracking error from following the index on its own. However, other variables such as time zone, forex, settlement time etc., can still make a big difference. It is, however, too early to pass judgement on this matter.

Tracking error of Motilal Oswal Nasdaq 100 Fund of Fund

Two one year periods can be studied with the base date of 23rd July 2020. The fortunes of the ETF and, therefore, the fund of fund have swing both ways!

DurationN100 TR INR ReturnFOF ReturnETF NAV ReturnETF Price Return
July 23rd  2020 to July 23rd 202143.2%35.9%37.2%37.1%
July 24th 2019 to July 23rd 202044.6%49.4%48.2%49.5%

After the fund of fund launch, the AMC has managed to keep the price-nav deviations reasonably low, but the deviations compared to the index have been quite high.

Tracking error of Motilal Oswal Nasdaq 100 ETF

Motilal Oswal AMC failed to efficiently reduce the Nasdaq 100 ETFs price – nav deviations until they launched the fund of fund. In fact, the launch date of the fund of fund can be easily guessed from the ETF’s price and NAV plot!

Motilal Oswal Nasdaq 100 ETF Price vs NAV evolution
Motilal Oswal Nasdaq 100 ETF Price vs NAV evolution

So when I reviewed the fund of fund in its NFO period, I saw some huge price-nav deviations and was one of the reasons for writing this: Motilal Oswal Nasdaq 100 Fund of Fund: Do not invest! I get a lot of stick for this article and associated YouTube video, but I stick with my opinion of “do not invest” in N100 – concentration risk + volatility.

DurationN100 TR INR ReturnETF NAV ReturnETF Price Return
July 23rd  2020 to July 23rd 202143%37.2%37.1%
July 24th 2019 to July 23rd 202045%48.2%49.5%
July 24th 2018 to July 24th 201910%7.8%-9.7%
July 24th 2017 to July 24th 201835%32.0%32.2%
July 24th 2016 to July 24th 201723%20.8%49.5%
July 25th 2015 to July 24th 20169%6.5%7.6%
July 25th 2014 to July 25th 201524%22.5%18.0%
July 25th 2013 to July 25th 201433%32.9%33.9%
July 25th 2012 to July 25th 201328%25.0%28.9%
July 26th 2011 to July 25th 201235%33.9%32.7%

The N100 ETF has seen some years of reasonably low tracking error, but this depends on US market volatility and local supply vs demand.

In summary, these passive investing options have not yet reached a level of consistently low tracking error. Unfortunately, active mutual funds – be it Indian funds investing a small amount in international, equity-like PPFAS Flexicap or wholly international funds – suffer from fund manager risks and high fees.

While we still feel that the Motilal Oswal S&P 500 Index Fund (click the link to check what returns to expect) is the most reasonable option to invest in the US/international market, we should keep an eye on its tracking error and hope it improves in future. Let us hope there are more international passive fund of fund options with low cost, low tracking error ETFs and index funds in future.

Do share this article with your friends using the buttons below.

🔥Enjoy massive discounts on our courses, robo-advisory tool and exclusive investor circle! 🔥& join our community of 5000+ users!
Use our Robo-advisory Tool for a start-to-finish financial plan! More than 1,000 investors and advisors use this!
New Tool! => Track your mutual funds and stock investments with this Google Sheet!
We also publish monthly equity mutual funds, debt and hybrid mutual funds, index funds and ETF screeners and momentum, low-volatility stock screeners.
Follow Freefincal on Google News
Follow Freefincal on Google News
Subscribe to the freefincal Youtube Channel. Subscribe button courtesy: Vecteezy.
Subscribe to the freefincal Youtube Channel.
Follow freefincal on WhatsApp Channel
Follow freefincal on WhatsApp
Podcast: Let's Get RICH With PATTU! Every single Indian CAN grow their wealth! 
Listen to the Lets Get Rich with Pattu Podcast
Listen to the Let's Get Rich with Pattu Podcast
You can watch podcast episodes on the OfSpin Media Friends YouTube Channel.
Lets Get RICH With PATTU podcast on YouTube
Let's Get RICH With PATTU podcast on YouTube.

  • Do you have a comment about the above article? Reach out to us on Twitter: @freefincal or @pattufreefincal
  • Have a question? Subscribe to our newsletter using the form below.
  • Hit 'reply' to any email from us! We do not offer personalized investment advice. We can write a detailed article without mentioning your name if you have a generic question.

Join over 32,000 readers and get free money management solutions delivered to your inbox! Subscribe to get posts via email!

About The Author

Pattabiraman editor freefincalDr 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 ten 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 investment advice.
Our flagship course! Learn to manage your portfolio like a pro to achieve your goals regardless of market conditions! More than 3,000 investors and advisors are part of our exclusive community! Get clarity on how to plan for your goals and achieve the necessary corpus no matter the market condition is!! Watch the first lecture for free!  One-time payment! No recurring fees! Life-long access to videos! Reduce fear, uncertainty and doubt while investing! Learn how to plan for your goals before and after retirement with confidence.
Our new course!  Increase your income by getting people to pay for your skills! More than 700 salaried employees, entrepreneurs and financial advisors are part of our exclusive community! Learn how to get people to pay for your skills! Whether you are a professional or small business owner who wants more clients via online visibility or a salaried person wanting a side income or passive income, we will show you how to achieve this by showcasing your skills and building a community that trusts and pays you! (watch 1st lecture for free). One-time payment! No recurring fees! Life-long access to videos!   
Our new book for kids: “Chinchu Gets a Superpower!” is now available!
Both boy and girl version covers of Chinchu gets a superpower
Both the boy and girl-version covers of "Chinchu Gets a superpower".
Most investor problems can be traced to a lack of informed decision-making. We made bad decisions and money mistakes when we started earning and spent years undoing these mistakes. Why should our children go through the same pain? What is this book about? As parents, what would it be if we had to groom one ability in our children that is key not only to money management and investing but to any aspect of life? My answer: Sound Decision Making. So, in this book, we meet Chinchu, who is about to turn 10. What he wants for his birthday and how his parents plan for it, as well as teaching him several key ideas of decision-making and money management, is the narrative. What readers say!
Feedback from a young reader after reading Chinchu gets a Superpower (small version)
Feedback from a young reader after reading Chinchu gets a Superpower!
Must-read book even for adults! This is something that every parent should teach their kids right from their young age. The importance of money management and decision making based on their wants and needs. Very nicely written in simple terms. - Arun.
Buy the book: Chinchu gets a superpower for your child!
How to profit from content writing: Our new ebook is for those interested in getting side income via content writing. It is available at a 50% discount for Rs. 500 only!
Do you want to check if the market is overvalued or undervalued? Use our market valuation tool (it will work with any index!), or get the Tactical Buy/Sell timing tool!
We publish monthly mutual fund screeners and momentum, low-volatility stock screeners.
About freefincal & its content policy. Freefincal is a News Media Organization dedicated to providing original analysis, reports, reviews and insights on mutual funds, stocks, investing, retirement and personal finance developments. We do so without conflict of interest and bias. Follow us on Google News. Freefincal serves more than three million readers a year (5 million page views) with articles based only on factual information and detailed analysis by its authors. All statements made will be verified with credible and knowledgeable sources before publication. Freefincal does not publish paid articles, promotions, PR, satire or opinions without data. All opinions will be inferences backed by verifiable, reproducible evidence/data. Contact information: letters {at} freefincal {dot} com (sponsored posts or paid collaborations will not be entertained)
Connect with us on social media
Our publications

You Can Be Rich Too with Goal-Based Investing

You can be rich too with goal based investingPublished by CNBC TV18, this book is meant to help you ask the right questions and seek the correct answers, and since it comes with nine online calculators, you can also create custom solutions for your lifestyle! Get it now.
Gamechanger: Forget Startups, Join Corporate & Still Live the Rich Life You Want Gamechanger: Forget Start-ups, Join Corporate and Still Live the Rich Life you wantThis book is meant for young earners to get their basics right from day one! It will also help you travel to exotic places at a low cost! Get it or gift it to a young earner.

Your Ultimate Guide to Travel

Travel-Training-Kit-Cover-new This is an in-depth dive into vacation planning, finding cheap flights, budget accommodation, what to do when travelling, and how travelling slowly is better financially and psychologically, with links to the web pages and hand-holding at every step. Get the pdf for Rs 300 (instant download)