To all those passive investors who worry about tracking error on their investments: I salute you.
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.
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.
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
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
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.
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,
- 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. [↩]
- ETFs from iShares do, for instance. [↩]
- See the part about code suffixes in Final Tips. [↩]
- That’s pretty much all the ETFs and index funds you’ll find in Europe. [↩]