HSBC FTSE 100 Index vs. iShares 100 UK Equity Index

aroominyork

I have just realised it makes sense to swap my UK All Share Index holding for a FTSE 100 Index, because I hold a UK smaller companies fund so I have the sub-100 companies well covered. Looking at HSBC vs. iShares, the latter is 0.03% pa cheaper for OCF but has a chunky 0.5% bid/offer spread.

Although the HSBC factsheet says there are 101 holdings, HL says there are 114 and the top ones are AZ 5.91%, Unilever 5.72%, HSBC 4.40%, Diageo 4.14%, GSK 3.63%. iShares, by contrast, is shown by HL as having 104 holdings led by AZ 7.13%, Unilever 5.11%, HSBC 4.57%, Diageo 4.22%, GSK 3.78%. In other words, iShares is more concentrated. Can anyone explain what is going on here?

In each of the five years to 31/12/21 (according to the two funds' factsheets) iShares has outperformed HSBC, annualised 4.71% compared to 4.60%.

jimjames

UK smaller companies might not cover the companies outside the FTSE100. You need to check details. There is also the FTSE250 which is the next 250 largest after the FTS100 so the All share might be the better option as it also avoids the churn of companies going in and out of the index. The performance is little different from what I recall but the AS was cheaper.

It might be that those funds hold candidates for inclusion or the data is wrong.

Alexland

Can anyone explain what is going on here?

If you are interested I suggest you try and find and download the portfolio holdings spreadsheet that is often periodically published on the fund managers' websites to determine what they are holding in the fund. The funds may have different dates for making this disclosure.

Remember that a tracker does not need to hold an exact copy of the index - only assets required to broadly give the long term performance of the index. This may be done optimally with either less or more holdings by either missing out on insignificant small companies or continuing to hold something that has been recently demoted from the index until a better time to sell or to see if it goes back into the index later etc. There may also be modest use of instruments to address any imbalance in the holdings of the fund compared to the market and of course money market investment(s) to support fund unit redemptions.

aroominyork

jimjames said:

UK smaller companies might not cover the companies outside the FTSE100. You need to check details. There is also the FTSE250 which is the next 250 largest after the FTS100 so the All share might be the better option as it also avoids the churn of companies going in and out of the index. The performance is little different from what I recall but the AS was cheaper.

Yes, by holding FTSE100 and smaller companies I have a bit of a gap in the midcap space. There is no perfect solution - and no need for one - just a good enough fit.

Alexland said:

If you are interested I suggest you try and find and download the portfolio holdings spreadsheet that is often periodically published on the fund managers' websites to determine what they are holding in the fund. The funds may have different dates for making this disclosure.

That way, I fear, would lead to madness.

masonic

The HSBC fund has experienced a spike in tracking error that seems to have occurred during 2021, it underperformed the index by 0.79% vs 0.09% for the iShares fund. Tracking error for the iShares fund is lower over other discrete 1 year periods too (HSBC 0.2-0.3% vs iShares ~0.03% but one year 0.08%). All in the factsheet. As to why, I don't know. Probing the annual reports and holdings over time as Alex suggests would be the only way to find out, but the HSBC fund doesn't look very good based on its past 5 calendar years performance.

aroominyork

masonic said:

The HSBC fund has experienced a spike in tracking error that seems to have occurred during 2021, it underperformed the index by 0.79% vs 0.09% for the iShares fund. Tracking error for the iShares fund is lower over other discrete 1 year periods too (HSBC 0.2-0.3% vs iShares ~0.03% but one year 0.08%). All in the factsheet. As to why, I don't know. Probing the annual reports and holdings over time as Alex suggests would be the only way to find out, but the HSBC fund doesn't look very good based on its past 5 calendar years performance.

It's a similar picture in the All Share index. Question: does tracking error necessarily lead to under-performance or could it as easily lead to over-performance?

masonic

aroominyork said:

masonic said:

The HSBC fund has experienced a spike in tracking error that seems to have occurred during 2021, it underperformed the index by 0.79% vs 0.09% for the iShares fund. Tracking error for the iShares fund is lower over other discrete 1 year periods too (HSBC 0.2-0.3% vs iShares ~0.03% but one year 0.08%). All in the factsheet. As to why, I don't know. Probing the annual reports and holdings over time as Alex suggests would be the only way to find out, but the HSBC fund doesn't look very good based on its past 5 calendar years performance.

It's a similar picture in the All Share index. Question: does tracking error necessarily lead to under-performance or could it as easily lead to over-performance?

It can lead to outperformance, but I don't think that would be anywhere near as common as underperformance. There was an example I presented many years ago of the HSBC American Index, which, despite having an AMC of 1% at the time, only underperformed the index by about half that over one 5 year period and was a top quartile performer in its sector. Certain causes of tracking error would be expected to lead to underperformance rather than outperformance, such as being relatively slow to add/remove companies from the fund. There is a tendency for new entrants to the index to continue their trajectory upward, and removals to continue their decline, in part due to trading activity of other index funds.

aroominyork

iShares UK Equity Index has a 3 year tracking error of 0.24. HSBC FTSE All Share's is 3.14. That seems to suggest a poorly managed fund - is that fair?

PS  HL shows iShares as holding 0.69% in cash, HSBC holds 3.45% in cash. Might this high cash holding by HSBC partly explain the tracking error? And, why would a fund tracking a very liquid market hold that much cash?

masonic

aroominyork said:

iShares UK Equity Index has a 3 year tracking error of 0.24. HSBC FTSE All Share's is 3.14. That seems to suggest a poorly managed fund - is that fair?

I also had a quick look at the HSBC European Index, which I hold as a tilt. Like the FTSE 100 and FTSE All share trackers, something happened in 2021 to create a disproportionately high tracking error. Prior years look ok, it's even tighter than the main contenders. It does seem that there is some practice that has come back to bite them over the last 12 months in particular. Looking at discrete periods of time will give you the most insight into what is going on in this instance.

Both the UK index funds seem to have more of a persistent problem. Lower tracking error is preferable as it is more likely to work against you than for you. Consistently lower tracking error is better management in my view.

aroominyork said:

PS  HL shows iShares as holding 0.69% in cash, HSBC holds 3.45% in cash. Might this high cash holding by HSBC partly explain the tracking error? And, why would a fund tracking a very liquid market hold that much cash?

That could contribute. Cash holdings will only be a snapshot though, so may just be a matter of timing. High cash is obviously bad in rising markets, but will lead to overperformance in falling markets if the invested capital matches the index. The risk is that transactions in general are subject to overzealous efficiency measures to keep costs down.

masonic

Deleted_User said:

I would hope that, when an index fund appears to hold as much as 3% in cash, it is using futures contracts to give approximately the same return as if that cash were invested.

These HSBC funds are single-priced, so could we be seeing tracking errors due to swing pricing? If that's what it is, that is a kind of tracking error that can sometimes be in your favour. (The iShares funds are dual priced, so there won't be swing pricing, but you do pay the spread, as the OP noted.)

The tracking error data being used is that declared by the fund house on its factsheet, so I'd be surprised if anomalous factors have crept in. Derivatives can be used by the fund according to the risk warning on the factsheet.

Interestingly the KIID states that the anticipated tracking error is expected to be up to 0.1%, but it has been significantly higher than this in each of the last 5 calendar years, and always negative.