However, on the other end of the spectrum, tracking errors may widen if the fund holds securities not from the benchmark, due to cost and complications involving the creation and redemption process. [Creations and Redemptions]
Additionally, ETFs that hold non-U.S. securities exhibit tracking errors because the underlying indices are closed during normal U.S. trading hours. However, various fund sponsors use varied approaches to setting their NAVs.
“If the benchmark index isn’t also adjusting local closing prices to reflect the impact of current market conditions at 4 p.m., then there can be a difference in the index returns when compared with the fund’s returns,” Rob Haddad, a director at Interactive Data Corp., said int he article. “This differential can get amplified, depending on the day.”
For more information on ETFs, visit our ETF 101 category.
Max Chen contributed to this article.