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Thursday, October 31, 2024

Index fund tracking error screener Oct 2024


This index fund screener is based on tracking error and returns difference wrt benchmarks (aka tracking difference). The screener will help users evaluate how efficiently an index fund has tracked its underlying benchmark. It will also help to understand how tracking a midcap index or the Nifty 100, 500 differs from tracking the Sensex or the Nifty. There are now 90-plus index funds in the screener.

Update: Following a suggestion by Snehashis, the expense ratios and AUMs of the funds have been included from this month.

The index fund screener is a simple Excel file that can be opened using any spreadsheet utility. It has two sheets. (1) “Returns Index Funds”. This compares the trailing returns over the last 1,2,3,4,5,6,7 and 8 years of  40+ index funds and their corresponding benchmarks. The return difference (fund return minus index return) is listed. Actual return differences are more intuitive than tracking errors.  (2)  The tracking error of these 30+ index funds over the last 1,2,3,4,5,6,7 and 8 years is also provided.

The tracking error is the standard deviation of the index fund minus index monthly return differences. The lower the tracking error, the more efficiently the fund follows the index. Unlike returns, tracking error data over multiple durations is hard to find.  Also, many investors do not seem to appreciate that the tracking error depends on the duration. This screener hopes to change that.

We have already pointed out that lower expenses do not mean lower tracking errors while selecting index funds! With the TER of index funds starting to fluctuate, return differences are a better way to choose or track index funds.

How do I use the Index fund tracking error screener?

Investors should not look for funds with the lowest tracking error or the lowest return difference.  That would be too narrow. Instead, they should focus on funds consistently in the top 5 or even the top 10 in low tracking error and/or return differences.

Cast a broad net and choose one. Monthly updates on this screener will tell you how the tracking error worsened after a TER increase.

This is a screenshot of the file. The top and bottom panels represent the two sheets available.

Screenshot of the Index fund tracking error screener
Screenshot of the Index fund tracking error screener
  • If this quantity is positive, then the fund has outperformed the benchmark! This is typically a red flag. I would avoid such funds.
  • The tracking error is always positive, and you can screen by the lowest tracking error.
  • The fund return minus index return requires some attention. Some examples are given below.
Fund index fund return minus index return Notes
0.80% 1% -0.20% ok
-0.80% -1% 0.20% not ok
-1.20% -1% -0.20% ok
-3% -1% -2.00% not ok

The user must look for funds with a return difference greater than, say, -2% and less than 0%.  This can be accomplished with the Excel filter shown below.

How to use the Index fund tracking error screener
How to use the Index fund tracking error, screener

This is summarized in this video

What about ETFs? It is quite easy and tempting to compute the tracking error of ETFs with their NAV. However, this can be seriously misleading because their price and not NAV determine ETF returns.

So, ETF tracking should be done with price data and not NAV. Everyone uses NAV to compute returns and track ETF errors, which is useless to investors.

Our ETF tracker-based ETF price and ETF NAV is now available! The freefincal ETF tracking error screener.

Get the Index fund tracking error screener!

  1. This screener costs Rs. 111 and is meant for personal use only.  The cost is only for the current month; the data is in the sheet.
  2. Inside, you get discounted links to our two courses: How to get people to pay for your skills (aka earn from skills) and the lectures on goal-based portfolio management.
  3. While freefincal will do its best to publish updated screener sheets each month, it cannot guarantee it.
  4. The file contains no buy or sell recommendations and only has the abovementioned data.
  5. Enough care and effort have been put into weeding out errors. However, we cannot guarantee that the sheet is free of error.
  6. The buyer will have to research using the information in the spreadsheet. No recommendations or assistance are included in the sheet and will not be provided separately.
  7. We will not provide any further help or assistance in using the sheet.
  8. The sheet purchased is for personal use and should not be shared privately or publicly. 

Click here to pay Rs. 111 and download (instantly) the latest  Freefincal Index Fund Tracking Error Screener.

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