“It is not unusual that the ETF has higher volatility than the underlying index, in periods of extreme global market volatility,” said Robert Nestor, head of global product marketing at iShares, in the Bloomberg article. “The volatility in the price of the ETFs reflects investors’ reaction to market news and changes in sentiment, much of which occurs while U.S. markets are open, but emerging markets are closed.”
Morningstar’s Rawson says a few issues arise when investors try to calculate tracking error for emerging market ETFs.
“International ETF premiums and discounts will be much larger because fund NAVs are calculated based on prices when foreign markets close, many of which have stopped trading well before 4:00 p.m. in New York. Yet the ETFs continue to trade in New York, so their prices reflect information not yet embedded in their NAVs. For this reason, when an international ETF closes at a premium, we expect that premium to revert the next day when foreign markets open and the NAV incorporates the new information from the U.S. market,” the analyst wrote.
“Before dismissing ETFs that appear to have high tracking error, it helps to understand the root cause,” Rawson concluded. “High tracking error may result from technical and measurement issues.”
Full disclosure: Tom Lydon’s clients own EEM.