| All trackers are not equal |
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| 18/06/2006 | |
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All trackers (Exchange Traded Funds - ETFs) are not equal when it comes to their correlation with their underlying index. According to the latest research * by Lipper's analysts, European-managed ETFs often show a significant tracking error with non-European indices, whereas European-managed trackers with European underlying index do not show such a divergence. To get to this conclusion, the researchers drew a daily risk/return profile of 21 trackers to spot the premiums and the discounts compared to their underlying index. The spreads observed by Lipper usually have various reasons, among which the various time zones between the tracker management centre and the index calculation centre, trading days as well as currency movements. According to Lipper, "higher adverse-selection costs, contributing to wider bid-ask spreads, in addition to some ETFs pegged to international indices such as the NASDAQ 100 and intense short-sales activity, may have led to temporary discrepancies between the NAV and the price at which the ETF was traded" Trackers can also have a hard time tracking higher-volatility indices. "Underlying index volatility as reflected in ETF volatility may contribute to the inefficiencies inherent in the ETF product structure and therefore can be anticipated by regressing current ETF volatility levels over one-day lagged volatility and current on exchange trading volume." In turn, an uneven tracking performance could generate opportunities for sophisticated investors according to Lipper. "In particular, there might be a potential to anticipate any impacts of disturbances in the underlying stock market and information flow arrival, with opportunities to lock in profits through cross-border trading on similar ETFs pegged to the same underlying index." J.L. * European Exchange-Traded Funds Unwrapped: An Investigation, Lipper Research Study |
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