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Analysis of International ETF Tracking Error in Country-Specific Funds

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Abstract

The goal of this study is to determine which fund or country-specific characteristics predict accurate performance in terms of tracking country-specific stock market indices. Ninety-three country-specific exchange-traded funds from 47 different countries are included in this study. In accordance with market integration theory, the Heritage Foundation Economic Freedom Index is a significant explanatory variable for tracking error. In agreement with the momentum effect, the exchange-traded fund return relative to the total U.S. equity market return is a significant explanatory variable for tracking error. Finally, the exchange-traded fund expense ratio is a significant explanatory variable for tracking error. Investors seeking returns from international investments should carefully examine their country of interest Economic Freedom Index and fund-specific expense ratio in order to anticipate any divergence from their exchange-traded fund return and the benchmark index return.

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Acknowledgements

The author would like to thank the participants of the international financial markets session at the Eighty-Fourth International Atlantic Economic Conference, held October 5-8, 2017 in Montreal, Canada for their useful comments and suggestions.

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  1. Anderson University, Anderson, SC, USA

    Kent T. Saunders

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  1. Kent T. Saunders
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Correspondence to Kent T. Saunders.

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Saunders, K.T. Analysis of International ETF Tracking Error in Country-Specific Funds. Atl Econ J 46, 151–160 (2018). https://doi.org/10.1007/s11293-018-9574-x

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  • DOI: https://doi.org/10.1007/s11293-018-9574-x

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