The Research Of Tracking Errors On Chinese ETFs And Their Feeder Funds

In the 1st quarter of 2011, blue chips such as excavation, financial service, real estate appeared to restore valuation, and pushed the market to rise continuously. Given this background, the ranking of open-end fund took a reversal compared to last year. In all the funds of 1st quarter, index funds delivered a overall good performance, among them ETF of Fortune SG value, as a representative of index funds in market, ranked the 1st place of standard index fund with a net value growth rate of 6.22%, its feeder fund's net value growth rate has also reached 5.70%.The first part of the paper, as introduction, presents the background of topic selection and the signification of this research. In the past few years, ETF in China has grown tremendously thus came along ETF feeder fund. One can tell from investor structured analysis of ETF, institutional investors have taken a larger proportion than individual. The emerge of ETF feeder fund means a lot to small-and medium-sized investors. From a managing perspective of ETF and ETF feeder fund, their risk control need not only involve regulatory authority, exchange houses, and fund companies, but also depository and clearing companies and index companies. From the investors'and fund managers'perspective, inspecting and controlling risk of ETF and its feeder fund bears the utmost importance.The second part introduces research accomplishment in tracking error accomplished by scholars home and abroad. They all conducted researches on the definition of tracking error, its optimization and the affecting factors.The third part presents theoretical foundation of this paper. The concept of ETF and ETF feeder fund is firstly introduced along with the difference between them, then the definition and cause of tracking error were pointed out, at last theoretical foundation of indexing investment was introduced.Applying empirical analysis, the fourth part used abundant data analysed the tracking errors of four ETF feeder funds in China and their corresponding ETF fund from June 22nd,2010 to March 25th,201 l,and studies on the factor that affect tracking error in order that investors can get a more profound view on tracking error of China's ETFs, improve their risk management and realize investment optimization with empirical evidenceThe conclusion lies in the fifth part, which was divided into two points. First is direct conclusion drawn from empirical results.(1) Study on tracking error is significant in the progress of indexing investment, and the control of tracking error will directly show in the yield of investment.(2) In the progress of indexing investment, causes such as transaction cost, management costs, behavior of constituent stock companies, transaction rules and index adjustment can lead to deviation between indexing portfolio and underlying index.(3) Different research results on tracking error yield different ways to measure it in indexing investment portfolio.(4) There is no comparability in tracking errors calculated from time intervals based on different sampling days.(5) Among all the fund utilization model, on average MAD model can produce a relatively better performance.(6) After taking transaction cost of constructing investment portfolio into consideration, tracking errors can be reduced through dynamic adjustment, meanwhile rate of return will also be reduced and cost in securities exchange shall rise.(7) Overall the tracking on ETF will be better than that on ETF feeder fund.The second part will be some advice drawn from the conclusion above.From a long term point of view, it is inevitable to completely replicate or sampling-replicate tracking errors.In developed foreign capital market, marketized measures are often taken to reduce tracking errors of ETF.However at present in China, the market is not as mature as abroad, therefore in order to reduce tracking errors, analysis should base upon the conditions of homeland.(1) the selection of replication.(2) In fund managing, cash holdings should be reduced as much as possible in order to reduce the influence on tracking errors caused by cash drag(3) Reducing overhead expenses and etc.(4) Dynamically tracing underlying index constituent stock, adjusting constituent stock component in time and seeking accurate replication index.(5) Pushing forward the development of financial derivatives market and perfecting financial market structure.