\ndetailed review is then matched with what ETF providers have to say.
\nThe below graphs represent a 30,000 feet analysis over a three-year timeframe for the largest ETFs tracking the
\nMSCI World, Emerging Markets and Europe indices and the two recognized indices S&P 500 and FTSE 100. Full
\nanalytical details and figures on other time periods are available on www.koris-intl.com\/etf-inside-out<\/a> for each index.<\/p>\n
The Tracking Difference (TD) represents Our investigation in those five diverse equity indices enables us to draw a number of conclusions that We strongly believe ETFs are not born equal and investors should seriously assess ETF tracking quality before putting money in a given fund.<\/p>\n The reader may have noticed that no provider manages to consistently deliver in the top-quartile for all equity products, this is even more so when switching to other asset classes. The selection of an ETF should therefore really be based on a detailed analysis of the vehicle itself rather than on the due diligence of the management firm.<\/p>\n We really hope that the transparency brought to institutional investors in a systematic and unbiased way will definitively provide the appropriate incentive to industry participants to improve the replication quality and the overall cost structure imposed upon the end economic beneficiaries. Here again, lack and inconsistency of data is leaving investors in a stormy fog. We are therefore adopting a very similar approach by aggregating and controlling data, then providing insight to end investors who in the end will base their allocations on tangible information.A high Tracking Error (TE) indicates
\npossible deviations from the index on a
\ndaily basis.<\/p>\n
\nthe average yearly cumulative difference
\nbetween the fund and its benchmark.<\/quote><\/p>\n![\"etf_inside_out_-_graph1-uk.jpg\"](\"http:\/\/beta.next-finance.net\/wp-content\/uploads\/2014\/11\/etf_inside_out_-_graph1-uk.jpg\")
\n![\"etf_inside_out_-_graph2-uk.jpg\"](\"http:\/\/beta.next-finance.net\/wp-content\/uploads\/2014\/11\/etf_inside_out_-_graph2-uk.jpg\")
<\/p>\n
\ninstitutional investors should carefully factor in when they address index and ETF selection during the portfolio
\nconstruction phase.<\/p>\n\n
\ndividend distribution and the associated tax implications is an essential part before deciding to
\nallocate to that universe. The development of smart beta products renders the task even more
\ninteresting \u2026 and challenging.<\/li>\n<\/ul>\n\n
\ndata and information from publicly available sources, including professional data feeds. Incorrect
\nNet Asset Values and out of date information on fund setup seems to be the norm in the industry
\nwhich makes the selection process a painful task.<\/li>\n<\/ul>\n\n
\nof the total costs of holding the instrument, while its stability over times will help investor assess
\nthe robustness of the investment process. We notice widespread differences amongst providers,
\nand significant variation of the yearly tracking difference over the period of existence of the
\nfunds.<\/li>\n<\/ul>\n\n
\ndifferent providers and replication approaches, even when data has been thoroughly controlled ;
\nwe do however not see TE as an issue for mid and long term investors (which remain the norm in
\nthe institutional space). Still too high tracking error levels might induce unwanted risk at the time
\nof trading the funds.<\/li>\n<\/ul>\n\n
\nthat result in tracking error, tracking difference or counterparty risk. It is the role of the ETF
\nmanager to design optimal implementation schemes and organize the elements of precaution
\nand protection to mitigate those risks. Investors should not base their decision on a broad model,
\nrather understand what they buy and how the specific setup results in or mitigate unwanted
\ninvestment risks.<\/li>\n<\/ul>\n\n
\n
\nOur experience in advising very large allocators to ETFs also leads us to believe that, beyond the pure performance and risk aspects of the ETFs themselves, more attention should be paid to the market structure in which they are negotiated and the way asset managers handle their execution flow in ETFs.<\/p>\n
\n![\"etf_inside_out_-_graph2-2.jpg\"](\"http:\/\/beta.next-finance.net\/wp-content\/uploads\/2014\/11\/etf_inside_out_-_graph2-2.jpg\")
\n
![\"\"](\"http:\/\/beta.next-finance.net\/wp-content\/uploads\/2014\/11\/etf_inside_out_-_graph1-uk-470x313.jpg\")
<\/a>\n\t\t\t<\/div><\/figure>![\"\"](\"http:\/\/beta.next-finance.net\/wp-content\/uploads\/2014\/11\/etf_inside_out_-_graph2-uk-470x313.jpg\")
<\/a>\n\t\t\t<\/div><\/figure>![\"\"](\"http:\/\/beta.next-finance.net\/wp-content\/uploads\/2014\/11\/etf_inside_out_-_graph2-2-470x313.jpg\")
<\/a>\n\t\t\t<\/div><\/figure>\n\t\t<\/div>\n\n","protected":false},"excerpt":{"rendered":"