TRACKING ERROR: Blown off course

"(…) It is a common belief that ETFs tracking smart beta indices (non-market-cap weighting schemes and/or factor exposure) exhibit weak replication quality due to friction costs implied by possib ...

Author(s) :

Noël Amenc

CEO - ERI Scientific Beta

Felix Goltz

Head of Applied Research - EDHEC-Risk Institute

Véronique Le Sourd

Senior Research Engineer - EDHEC-Risk Insitute

"(…) It is a common belief that ETFs tracking smart beta indices (non-market-cap weighting schemes and/or factor exposure) exhibit weak replication quality due to friction costs implied by possible more frequent and wide index rebalancing. EDHEC has produced an illustrative analysis of the performance of smart beta versus traditional exposure ETFs with regard to benchmarks. It sheds light on replication accuracy with no consideration of the risk/return profile of the benchmarks. The analysis covers a universe of 732 Europe-domiciled ETFs with three-year track records (January 2014 – December 2016). It shows that there is no evidence that smart beta ETFs would possibly exhibit poor performance relative to their benchmarks that are tracking non-market cap weighting schemes. Average tracking difference is strictly the same on the two universes, medians are close and dispersion around the mean is comparable. This analysis tends to contradict the common belief that smart beta benchmarks imply higher replication frictions due to more frequent or sizeable rebalancing. (...)"

Type : Press article
Date : le 16/11/2017
Research Cluster : Finance
Source : Funds Europe

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