Tracking differences for True cost of funds

mears1

Apologies in advance for some basic questions. (even though I have posted about Tracking differences before) Can't find/understand the info from monevator that applies to these particular figures. Everyone has been so helpful in my learning journey so just asking if anyone can help me interpret the following figures taken from Trustnet. regarding which product performed the best when deductions have been removed.
These have been taken from Trustnet and compare products that track Ftse All world.

                                                           OCF                Performance over 1 year             Benchmark over 1 year              1 year tracking difference
hsbc ftse all world C ACC                    0.13                46.93                                           43.57                                           3.36                
LGIM PMC All world Equity Index       0.09                 41.76                                           43.57                                         -1.81
VG Ftse All world UCITS ETF             0.22                 43.14                                           43.57                                          -0.43


1. What does a negative tracking difference mean?
2 What is the true cost of each fund? And is there any point of being guided by the OCF when trying to get a low cost tracker?
3. The hsbc outperformed the bench mark by 3.36 which surely must be good. But I understand the tracking difference will never be 0 because of the fees. But the other 2 products underperformed the bench mark, does that mean they didnt do so well, hence the negative benchmark?
4. What's the difference between tracking error and tracking difference.

Thank you.

GeoffTF

mears1 said:

Apologies in advance for some basic questions. (even though I have posted about Tracking differences before) Can't find/understand the info from monevator that applies to these particular figures. Everyone has been so helpful in my learning journey so just asking if anyone can help me interpret the following figures taken from Trustnet. regarding which product performed the best when deductions have been removed.
These have been taken from Trustnet and compare products that track Ftse All world.

                                                           OCF                Performance over 1 year             Benchmark over 1 year              1 year tracking difference
hsbc ftse all world C ACC                    0.13                46.93                                           43.57                                           3.36                
LGIM PMC All world Equity Index       0.09                 41.76                                           43.57                                         -1.81
VG Ftse All world UCITS ETF             0.22                 43.14                                           43.57                                          -0.43


1. What does a negative tracking difference mean?
2 What is the true cost of each fund? And is there any point of being guided by the OCF when trying to get a low cost tracker?
3. The hsbc outperformed the bench mark by 3.36 which surely must be good. But I understand the tracking difference will never be 0 because of the fees. But the other 2 products underperformed the bench mark, does that mean they didnt do so well, hence the negative benchmark?
4. What's the difference between tracking error and tracking difference.

Thank you.

You have not provided a link to the Monevator article. The numbers for VWRL are here:

https://www.vanguardinvestor.co.uk/investments/vanguard-ftse-all-world-ucits-etf-usd-distributing/overview

The OCF was reduced 3 years ago IIRC. The tracking error for the last four years is absolutely tiny, much smaller than the OCF + stated transaction costs, as a result of stock lending perhaps. (Vanguard pays all the profits from stock lending into the fund, unlike the others.) It seems to be doing what it says on the tin. Frankly, I am surprised it is that good.

GeoffTF

Interestingly, VEVE has not done as well despite the lower OCF, but the tracking error is still less than the OCF. Note that Vanguard's performance figures are for the NAV. ETFs can trade at a premium or discount to the NAV, and there is also the market spread, of course.

mears1

GeoffTF said:

mears1 said:

Apologies in advance for some basic questions. (even though I have posted about Tracking differences before) Can't find/understand the info from monevator that applies to these particular figures. Everyone has been so helpful in my learning journey so just asking if anyone can help me interpret the following figures taken from Trustnet. regarding which product performed the best when deductions have been removed.
These have been taken from Trustnet and compare products that track Ftse All world.

                                                           OCF                Performance over 1 year             Benchmark over 1 year              1 year tracking difference
hsbc ftse all world C ACC                    0.13                46.93                                           43.57                                           3.36                
LGIM PMC All world Equity Index       0.09                 41.76                                           43.57                                         -1.81
VG Ftse All world UCITS ETF             0.22                 43.14                                           43.57                                          -0.43


1. What does a negative tracking difference mean?
2 What is the true cost of each fund? And is there any point of being guided by the OCF when trying to get a low cost tracker?
3. The hsbc outperformed the bench mark by 3.36 which surely must be good. But I understand the tracking difference will never be 0 because of the fees. But the other 2 products underperformed the bench mark, does that mean they didnt do so well, hence the negative benchmark?
4. What's the difference between tracking error and tracking difference.

Thank you.

You have not provided a link to the Monevator article. The numbers for VWRL are here:

https://www.vanguardinvestor.co.uk/investments/vanguard-ftse-all-world-ucits-etf-usd-distributing/overview

The OCF was reduced 3 years ago IIRC. The tracking error for the last four years is absolutely tiny, much smaller than the OCF + stated transaction costs, as a result of stock lending perhaps. (Vanguard pays all the profits from stock lending into the fund, unlike the others.) It seems to be doing what it says on the tin. Frankly, I am surprised it is that good.

The link to the Monevator article https://monevator.com/choosing-a-tracker-using-tracking-difference/
What I gleaned from this is that you should use the tracking difference, rather than the ongoing charge as a guide to returns.

The link to the above figures https://www2.trustnet.com/passive-funds/global-equities.html.  This might be more helpful.
Thank you

jimjames

1. Negative or positive tracking error presumably means it did better or worse than index it was tracking. Understandable it could be either side of the tracker value.
2. OCF is a consistent way to compare costs.
3. Outperformance on a tracker isn't a good thing, it should match the index and if it goes above it could just as easily go below the next year. Ideally you want one that is very close to the index performance.

mears1

Jimjames, thank you for your explanation.

GeoffTF

jimjames said:

1. Negative or positive tracking error presumably means it did better or worse than index it was tracking. Understandable it could be either side of the tracker value.
2. OCF is a consistent way to compare costs.
3. Outperformance on a tracker isn't a good thing, it should match the index and if it goes above it could just as easily go below the next year. Ideally you want one that is very close to the index performance.

It is not as simple as that. VWRL has an OCF of 0.22%, and there are transaction costs on top of that. Nonetheless the tracking error for the NAV has been around a tenth of that in recent years, which surprised me. Stock lending might be the explanation. VEVE has a lower OCF of 0.12%, but has had a larger tracking error.

As I have said, ETFs can trade at a discount or premium to NAV, and there is a market spread. Nonetheless, it is the NAV tracking error that matters most to a long term investor - he only buys and sells once.

Thrugelmir

With regards to HSBC it does not track the index religously. 

FUND OBJECTIVE

The Fund aims to provide growth over the long term, which is a period of five years or more, by tracking the performance of the FTSE All-World Index (the “Index”).To achieve its investment objective, the Fund will invest directly in shares (equities) of companies that make up the FTSE All-World Index.The Fund may also invest in the following assets which are not part of the Index: - cash to manage day-to-day cash flow requirements - units or shares of collective investment schemes, including collective investment schemes managed or operated by the HSBC Group in order to manage day-to-day cash flow requirements. - equity related securities such as American Depositary Receipts and Global Depositary Receipts (which are certificates typically issued by a bank or trust company evidencing ownership of shares of a non-US issuer) in order to achieve exposure to a stock instead of using a physical security.The Fund may invest in derivatives for efficient portfolio management including hedging, which means investment techniques that aim to reduce risks, reduce costs or generate growth and income. The Fund does not intend to use derivatives extensively and their use will be consistent with the risk profile of the Fund.The Fund may sometimes not invest in all of the companies that make up the Index in circumstances where the ACD determines that this is appropriate for reasons of poor liquidity, excessive cost to the Fund or where there are investment restrictions due to regulations or the ACD’s banned weapons policy or other investment restrictions to which the ACD is bound.Use of benchmark The Fund will invest in a representative sample of the companies that make up the FTSE All-World Index and possibly some securities that are not included in the Index that are designed to help the Fund track the performance of the Index. This is generally known as optimised replication approach.

GeoffTF

mears1 said:

GeoffTF said:

mears1 said:

Apologies in advance for some basic questions. (even though I have posted about Tracking differences before) Can't find/understand the info from monevator that applies to these particular figures. Everyone has been so helpful in my learning journey so just asking if anyone can help me interpret the following figures taken from Trustnet. regarding which product performed the best when deductions have been removed.
These have been taken from Trustnet and compare products that track Ftse All world.

                                                           OCF                Performance over 1 year             Benchmark over 1 year              1 year tracking difference
hsbc ftse all world C ACC                    0.13                46.93                                           43.57                                           3.36                
LGIM PMC All world Equity Index       0.09                 41.76                                           43.57                                         -1.81
VG Ftse All world UCITS ETF             0.22                 43.14                                           43.57                                          -0.43


1. What does a negative tracking difference mean?
2 What is the true cost of each fund? And is there any point of being guided by the OCF when trying to get a low cost tracker?
3. The hsbc outperformed the bench mark by 3.36 which surely must be good. But I understand the tracking difference will never be 0 because of the fees. But the other 2 products underperformed the bench mark, does that mean they didnt do so well, hence the negative benchmark?
4. What's the difference between tracking error and tracking difference.

Thank you.

You have not provided a link to the Monevator article. The numbers for VWRL are here:

https://www.vanguardinvestor.co.uk/investments/vanguard-ftse-all-world-ucits-etf-usd-distributing/overview

The OCF was reduced 3 years ago IIRC. The tracking error for the last four years is absolutely tiny, much smaller than the OCF + stated transaction costs, as a result of stock lending perhaps. (Vanguard pays all the profits from stock lending into the fund, unlike the others.) It seems to be doing what it says on the tin. Frankly, I am surprised it is that good.

The link to the Monevator article https://monevator.com/choosing-a-tracker-using-tracking-difference/
What I gleaned from this is that you should use the tracking difference, rather than the ongoing charge as a guide to returns.

The link to the above figures https://www2.trustnet.com/passive-funds/global-equities.html.  This might be more helpful.
Thank you

The Monevator article is right to say that the best way is to look at how well the NAV tracks the index on the fact sheets. Using Trustnet to track the mid-market price is not the same. ETFs can trade a discount or premium. The NAV tracking error is what matters while you are in the fund. Buying or selling at a discount or premium is a separate matter. European (including UK) OEICs usually use swing pricing, so you can buy or sell at a discount or premium there too.

ChilliBob

How does one identify if a given Etf is on a premium or discount then @GeoffTF?

It's easy to see with ITs and to understand how this compares historically to see if its a good deal, how does one do this with an ETF? 

GeoffTF

ChilliBob said:

How does one identify if a given Etf is on a premium or discount then @GeoffTF?

It's easy to see with ITs and to understand how this compares historically to see if its a good deal, how does one do this with an ETF? 

The Authorised Participants clear away premiums and discounts when they become large enough to make that profitable for them after paying Vanguard's dilution levy, which goes into the fund. Mere mortals like us cannot get real time estimates of the discount / premium. (The ETF may cover markets that are not open.) The Vanguard website gives the closing prices and the NAV, but I do not know whether that is the NAV at the closing price. (Perhaps I should read the prospectus again.) You can calculate a discount/premium from those numbers. I expect that is the same number that Bloomberg gives on its website. It would be easy to check that. Vanguard gives statistics on the discount/premium. I do think it is a big issue for the big liquid ETFs holding liquid assets. There are, however, some pretty wild ones:

https://www.etf.com/sections/features-and-news/etfs-largest-premiums-discounts?nopaging=1

Here is some more info on discounts and premiums:

https://www.vanguard.co.uk/professional/insights-education/education/etfs-education/trading