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moneysense.ca, 15/03/10
Tracking error in TD e-Series Funds, Part 1
TD e-Series funds are popular holdings in many low-cost portfolios because the funds’ MERs are among the lowest for index mutual funds in Canada. We too own TD e-Series funds in our kids’ RESP accounts because, as I noted in earlier posts, these mutual funds are ideal for relatively smaller portfolios. However, I’ve never paid much attention to the tracking error of e-Series funds even though how well a fund tracks its benchmark is an important criterion in picking an index fund. After a recent note from a reader, who noticed a large tracking error in the TD International Index Fund for 2009, I decided to examine the tracking error in e-Series funds.
TD e-Series Canadian Bond Index Fund (TDB909)
The TD e-Series Canadian Bond Index Fund, which tracks the DEX Universe Bond Index, is a popular pick for the fixed-income component of a portfolio. It sports a MER of 0.48% but it’s tracking error averages 0.62% over the 2004-2009 period.
| Year | Bond Index | TDB909 | Difference |
|---|---|---|---|
| 2004 | 7.1% | 6.5% | 0.6% |
| 2005 | 6.5% | 5.7% | 0.8% |
| 2006 | 4.1% | 3.6% | 0.5% |
| 2007 | 3.7% | 3.2% | 0.5% |
| 2008 | 6.4% | 5.7% | 0.7% |
| 2009 | 5.4% | 4.6% | 0.8% |
TD e-Series Canadian Index Fund (TDB900)
The TD e-Series Canadian Index Fund has a MER of just 0.31%. The tracking error averages just 0.30% and the fund tracks the index fairly well as you can see from the table below.
| Year | Canadian Index | TDB900 | Difference |
|---|---|---|---|
| 2004 | 14.5% | 14.0% | 0.44% |
| 2005 | 24.1% | 23.3% | 0.64% |
| 2006 | 17.3% | 16.9% | 0.34% |
| 2007 | 9.8% | 9.6% | 0.18% |
| 2008 | -33.0% | -32.9% | -0.15% |
| 2009 | 35.1% | 34.6% | 0.37% |
Both TDB909 and TDB900 track their benchmarks reasonably well but the Canadian Bond Index does have a larger than expected tracking error. Tomorrow, we’ll take a look at the tracking error in TD e-Series US Index (TDB902) and the TD e-Series International Index (TDB911).
Note: Benchmark returns were obtained from the Libra Investments website.
moneysense.ca, 15/03/10
Is there a benchmark for tracking error? (I assume it can’t be 0.00%)
I guess the all important question now is:
How does the TD e-series compare to ETFs which track the same indicies, and if the TD e-series lags, is it by enough to warrant individuals changing to those ETFs? (but of course, this is only part I
)
In the past I know there have been some ‘generalizations’ regarding how much would make it worthwhile to buy the ETFs vs the TD e-series, but it seems like a very cut and dry calculation now could resolve that.
p.s. congrats on the partnership – maybe its cuz I’m not used to it yet, but new site seems a little busy.
@Geoff: Not sure I understand your question. Investors can expect tracking error to roughly equal the MER. But then there are foreign exchange rate fluctuations, withholding taxes, sampling errors etc. that could make the tracking errors worse (or better). A good domestic index fund (such as Vanguard Total Market Fund) will track the index fairly closely trailing pretty much by the fund’s MER.
https://personal.vanguard.com/us/funds/performance?FundId=0970&FundIntExt=INT&DisplayBarChart=false
@Sampson: I looked at tracking error in the popular ETFs in a cursory manner yesterday. By and large, the ETFs do a great job in tracking their benchmarks but the difference may not be enough to justify switching for smaller portfolios, especially for those investing bi-weekly or monthly.
http://ca.ishares.com/product_info/fund_returns.do?ticker=XIU
RE: the website. It’s a work in progress and you’ll see it improve over the next little while. Thanks for your feedback.
In an ideal world the tracking error should be zero. In the real world this would be nearly impossible to achieve. Rick Ferri wrote in his book “All About Index Funds” that 25bp below the benchmark is regarded as an ideal target.John Bogle also commented in his book “Common Sense on Mutual Funds” that the tracking error must be as close to zero as possible for market returns to be as close to 100%. I noticed the deviation a few months ago while I was comparing the e-series funds with iShares ETFs. Most of the iShares funds demonstrated a lower deviation.
@Lior: Are you using ‘deviation’ as a synonym of tracking error, or is there another metric to which you are referring? Thanks.
@AKA: I believe Lior is using “deviation” as a synonym for tracking error.
Just to be clear, the part of the difference in performance that comes from the MER isn’t really “error”, isn’t it?
So for the Canadian index, with 31 bp MER and 30 bp underperformance, we can say they tracked the index perfectly minus MER. For the bond index, with 62 bp underperformance and 48 bp MER, we could say 14 bp of “error”. If I’m reading this right.
@Charles: Your understanding is correct. “Tracking error” simply refers to how much an index fund’s return differs from the index it tracks. You’d expect some differences because of fees (and foreign exchange fluctuations, withholding taxes for foreign funds), so it not always an error.
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I have to say that I’m impressed with the low MERs with these funds..
I am interested in the tracking error for ING’s streetwise funds. Do you have any info to share on these index funds? Or any suggestions on how I could determine their tracking error?
Thank you.
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