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Can’t work out tracking error on your ETF or index fund? Try Bloomberg

To all those passive investors who worry about tracking error on their investments: I salute you.

Tracking error is a critical measure of index tracker performance. It’s poorly defined, however, and most private investors don’t know where to look for good tools that can provide a ready reckoning.

But I think I’ve found the answer. I’ve been on a quest for some time to find a service that enables passive investors to compare virtually any tracker they own against its index, as well as against rival tracker funds.

And I now think Bloomberg is the way to go.

If you want to compare trackers versus the FTSE 100 or S&P 500 then you’re spoiled for choice. Yahoo Finance, Google Finance, Reuters, Trustnet, and MorningStar all offer partial remedies1.

But if you track the emerging markets or global property or a high dividend index, then turn to Bloomberg to stick that index on a chart and see which funds mimic it like a lyre bird, and which are more like a poor man’s Bobby Davro.

Step 1: Choose your index tracker

Bloomberg’s chart tool dials up data via Bloomberg codes. We need to know the correct code for each fund and index we want to track.

First, choose your tracker. If you’re lucky then the fund factsheet or website will list its Bloomberg code2. You can stick that straight into Bloomberg’s search box3 and you’re on your way.

If you don’t know the code then it’s time to root around in Bloomberg’s funds bazaar, where the ETFs and mutual funds of many nations rub shoulders.

  • I found it easiest to choose funds by location rather than objective or even alphabetical order (there are too many American funds to sieve).
  • Most trackers intended for UK investors sit in the UK section.
  • However, some funds are categorised by their domicile.
  • Vanguard funds based in Ireland are found in the Irish section. iShares funds domiciled in Ireland sit in the UK section. (Hey, why make it easy?)

Begin your search in the UK section but, if you can’t find a fund, then check its domicile on its factsheet and rummage around in that country’s silo on Bloomberg.

Of course you could type your fund’s name into the search box, but you risk choosing the wrong version if you get the name slightly muddled. For that reason, I think it’s best to hunt manually.

Funds are categorised alphabetically by fund provider, as you would expect. In the UK section, you’ll find db X-trackers listed from page 19, HSBC from page 28, iShares from page 34, and Vanguard from p.72 (p.44 in Ireland).

Once you’ve found your fund, click through to its overview page.

See the Bloomberg code in the top left

It’s a good idea to note the Bloomberg code for your fund (circled in the pic above). I’ve chosen to track the Vanguard Emerging Market Stock Index fund (income, GBP version).

The code here is: VANEMPI:ID.

If I want to track a different fund later then I’ll be able to use this code to pull up the Vanguard fund’s data on another fund’s chart.

Finally, click the chart link (circled in pic above) to pull up a performance chart for your fund.

Step 2: Choose your rivals

Add funds to compare

Compare rival funds by tapping their Bloomberg codes into the ‘add a comparison’ field circled in the pic.

Get the codes as explained above or use the search box if you’re the devil-may-care type.

MorningStar’s quick rank tools are your friend when it comes to finding new funds in the same asset class.

Your chart will now be covered in multi-coloured squiggles as if raced over by genetically modified snails.

Step 3: Add the right index

The final step to checking tracking error is to add its index into the comparison field of your fund chart.

The right index is always the index that the trackers actually track. The fund’s factsheet will tell you which index it follows.

Don’t trust Bloomberg or anyone else to select the benchmark for you. They frequently select an index in the right ballpark but they don’t always worry about an exact fit. A tracking error comparison is meaningless if you’re pitting your fund against the wrong index.

Each index has its own Bloomberg code, just like the funds. Pop the code in the ‘add a comparison field’ to paint the index squiggle on your chart.

You don’t know the Bloomberg code for every index in your collection? Tsk, tsk, it’s like you have a life or something.

The easiest way to get the code, once again, is to rifle through your fund’s website or factsheet for that index’s Bloomberg code.

For example, the Bloomberg code for the MSCI Emerging Markets Index is MXEF:IND.

The :IND component is a suffix that denotes the code is for an index. Make sure to add this bit on if it’s missing from the factsheet.

You can search Bloomberg for indices, although I found this method unreliable. Go to Bloomberg’s index emporium and try searching alphabetically for all those FTSE and MSCI benchmarks.

Remember that there can be three different versions of an index:

  • Price return (PR) – Dividends aren’t included in performance figures.
  • Total return (TR) – Dividends are included.
  • Net return (NR) – Dividends are included but with a deduction for tax.

Make sure you pop the right version of the index on your chart. If Bloomberg will only give you the price return index then make sure you compare it against income / distributing versions of your tracker rather than accumulation varieties.

That way you’re not comparing a fund that’s gorged with dividend returns versus an index that isn’t.

Step 4: Analysis

Check the percentage gain

At last we have our funds pitted against their index.

In the example above, we’ve got the Vanguard Emerging Markets Index fund inc (orange) vs iShares MSCI Emerging Markets ETF (green) vs the MSCI Emerging Markets price return index (light orange).

I’ve annotated the components that are most important to understand in the pic above. Note the numbers in the circle refer to daily changes and are thus irrelevant for our purposes.

We want as long a comparison as possible. Three years is a minimum, five years is OK. Ten years is sadly beyond the capability of the charting tool.

Visually, it’s very difficult to tell which tracker has most closely hugged the index as they bounce around over time.

You can do it though by collecting the opening and closing numbers of the funds and index over the entire timeframe.

In other words, move your cursor to the far left-hand side of the chart and note the values for each tracker and the index (see the upward pointing arrows on the pic) on the first day of the comparison.

Now move your cursor to the far right and scribble down the values for the final day of the comparison.

Pop your numbers in a percentage gain calculator to find out total gain (or loss) made by each fund and the index.

Note: The gulf in the actual prices and index points doesn’t matter here. It’s the percentage change we care about.

Whichever fund’s performance most closely matches the index wins. This is the fund that has suffered the least tracking error (or more accurately tracking difference).

If you want to gauge performance on an annualised basis, stick your numbers into a compound annual growth (CAGR) calculator.

Final tips

If you’re not sure you’ve picked the right version of the fund then compare its current price with the price listed on its website or MorningStar. Double check that the prices are from the same day – the fund providers aren’t always as electric as Bloomberg.

Funds have suffixes that denote their listed location, such as :LN for the UK and :ID for Ireland. Be sure to add these on to the ticker codes when searching for them on Bloomberg.

Go to the chart’s settings > ‘enable tracking’ to read the vertical axis using the cursor.

I can’t vouch for the accuracy of the data provided by any company. It’s a good idea to get a read from a couple of different sources, including the fund provider, before coming to any firm conclusions about tracking error.

The good news is that the EU will soon require all UCITS4 index trackers to provide tracking error predictions from this year.

All the same, those figures will be ‘predictions’. Track record counts when it comes to tracking error.

Take it steady,

The Accumulator

  1. Note: There are though some difficulties with using the data from some of these services in certain instances, which we discovered when looking into the tracking error of UK ETFs. []
  2. ETFs from iShares do, for instance. []
  3. See the part about code suffixes in Final Tips. []
  4. That’s pretty much all the ETFs and index funds you’ll find in Europe. []

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{ 6 comments… add one }
  • 1 Simon February 26, 2013, 11:45 am

    Thanks, TA. A few useful index codes I’ve come across on my travels:

    ASX:IND – FTSE All Share
    UKX:IND – FTSE 100
    SPX: IND – S&P 500
    INDU:IND – The DJIA
    FTAW12:IND – FTSE World Europe ex-UK (e.g. HSBC European Index Tracker)

  • 2 Linda February 27, 2013, 8:48 am

    Wow, thanks for this post! Ah… So the New Zealand Top 50 ETF that I’ve invested a small amount in, doesn’t track its index very well… Does that mean it’s a total loser of an ETF?

    Total time range : 17% for index, -1.94% for ETF (For some reason it disconnected heavily around 2009. Fortunately we only started investing in it this year, where it’s done fairly well (But not as well as the index!).
    Last 5 years : 23.96% index, 19.69% ETF
    Last year : 27.21% index, 20.63% ETF

    It’s unfortunately the only New Zealand top 50 index. I see the NZ 10 ETF has tracked a lot better to the top 10 index so perhaps a better investment.

    On the other hand, in the Australian market, the Vanguard ETF VAS is off the AUS 300 index by -0.13%, not bad!

    Thanks again!

  • 3 Linda February 27, 2013, 9:07 am

    Think I answered my own question. Firstly the ETF in question has an expense ratio of 0.60%. It also states in the fund sheet that it caps any one company at 5%. The relatively small NZ market has a few heavyweight companies like Telecom which probably did extremely well compared to the total market. On the flip side, a major fall by one of these companies will cause less of a disaster to the ETF.

    Cheers 🙂

  • 4 saveonarola February 28, 2013, 10:49 am

    Great post, as usual. I wonder how significant the differences would be from looking at different data points. One tracker might be further away from the index at a given moment in time, because of its replication strategy, but might be closer to the index on average over a period of time. Is there a risk in just looking at one data point, or do you think that’s too small to worry about over, say, a five-year period?

  • 5 The Accumulator March 1, 2013, 7:13 pm

    @ Linda – you’re right, any ETF that’s way off the index isn’t doing right by you. When researching any index tracker, it’s worth looking at whether that index is too heavily concentrated on a few big companies or sectors. If it is, then you’re losing the benefit of diversification.

    @ Save – It’s always worth taking a look at another tool, I think, especially if it offers you a ten-year view, or if the performance of a particular fund is way out of whack. As retail investors, our tools are pretty blunt and subject to error or misuse. I don’t think it’s worth undue worry, but skepticism is healthy in these matters.

  • 6 z1lv1n4s March 25, 2014, 12:59 am

    Hi,

    I wanted to check the tracking error of the BlackRock fund you use: GB00B5VRGY09 in your slow and steady portfolio. I’m not able to find the index for FTSE Developed – United States Net TR Index. Do you know where to find this particular one?

    On another side note I’d love you to do a comparison between your portfolio and other portfolios. I’ve been trying to compare vanguard 80%, or a simplified version with 1 Vanguard fund for World Ex equities or even the 50/50 portfolio. All of them seemed to be at 9% for 2013 and yours was at 11%. To be honest I don’t see anything wrong to invest in your demo portfolio for real just want to check the tracking errors 🙂

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