Comparison of ETF´s performance related to the tracking error

Abstract

With the development of financial markets, there is also immediate expansion of fund industry, which is a representative issue of collective investment. The purpose of index funds is to replicate returns and risk of underling index to the largest possible extent, with tracking error being one of the most monitored performance indicator of these passively managed funds. The aim of this paper is to describe several perspectives concerning indexing, index funds and exchange-traded funds, to explain the issue of tracking error with its examination and subsequent comparison of such funds provided by leading investment management companies with regard to different methods used for its evaluation. Our research shows that the decisive factor for occurrence of copy deviation is fund size and fund´s stock consolidation. In addition, performance differences between exchange-traded fund and its benchmark tend to show the signs of seasonality in the sense of increasing in the last months of a year.