Both FlexShares and Vanguard help investors focus on the fact that portfolio management, even in passive index-based funds, can have a role in overall returns since the way a firm executes its index tracking methodology can impact tax efficiency and tracking errors.
For instance, Ed Rosenberg, senior vice-president and head of capital markets and analytics for the Northern Trust subsidiary, points out that a fund manager’s choice of securities to include in a creation/redemption basket can cause an ETF to outperform or underperform the target index. An ETF may exhibit greater short-term volatility, which can cause the fund’s performance to greatly diverge from the benchmark over time.
“If an investor looks at excess return and tracking error, that can help them answer the question: Did the fund meet their expectations?,” Rowley added.
For more information on ETFs, visit our ETF 101 category.
Max Chen contributed to this article.