ETF Tracking Error: ETFs invest in the stocks included in any one index as the basis. These benchmark indices will help in understanding the tracking error
During a discussion on Clubhouse, which came into vogue late on Wednesday night, SBI Mutual Fund House’s fund manager Srinivas Jain said about investing in the stock market and mutual funds that investors are no longer just the expense ratio, but also the tracking error before investing in ETFs. lets see. Rather, they now focus more on tracking errors. We have covered three technical terms for you in this one sentence – ETF, Expense Ratio and Tracking Error. Let me explain all these to you in detail.
ETF means Exchange Traded Funds. You must have heard SIP of Rs 100 but if you want to invest less than this and do not want to lock-in the money, then ETFs can prove to be a good option. They work like mutual funds but are traded on the exchange of the stock market. This means that these funds can be bought and sold from the exchange like shares.
ETFs invest in the stocks included in any one index (indexes like Sensex, Nifty) as the basis. Take a look at this benchmark index as it will help you to understand the tracking error.
tracking error
Investing in an index fund or ETF is based on a specified benchmark. If the return of this benchmark is more than the return of the fund, the difference between the two is considered a tracking error. Funds The goal of any ETF or index fund is to deliver returns similar to the stock market. If the fund does not give returns like the benchmark, that is, the tracking error is high, then the fund is failing in its target.
This difference can come due to many reasons. First, after changing the composition of the shares in the index, the time taken by the fund manager to make these changes resulted in a tracking error. At the same time, the second is because of redemption. Many a times there is a large redemption seen in funds. As long as the investment coming into the fund is more than the amount going out, then there is no problem. But, if the withdrawals are high, the fund manager has to settle it by selling some securities. This may have some effect.
At times, this tracking error may also be due to the fact that not all the stocks included in the index are held by the fund.
The fund house has to inform the investors about this tracking error. The lower the tracking error, the better. Tracking error shows how under-performing the fund is against the benchmark index.
What is Expense Ratio?
The asset management company also bears the expenses like transfer, legal, auditing of mutual funds. Apart from this, she also bears the expenses of fund distribution and marketing.
All these expenses are recovered from the investors who buy the units of the mutual fund. The net asset value of a mutual fund scheme is arrived at after deducting all such expenses.
Expense Ratio is a ratio that gives per unit expenditure incurred on managing a mutual fund. To calculate the expense ratio of a mutual fund, its total assets under management are divided by the total expenses.
