This index fund screener is based on tracking error and returns difference wrt benchmarks (aka tracking difference). The screener will help users evaluate how efficiently an index fund has tracked its underlying benchmark. It will also help a understand how tracking a midcap index or the Nifty 100, 500 differs from tracking the Sensex or the Nifty.
The index fund screener is a simple Excel file that can be opened in any spreadsheet utility. It has two sheets. (1) “Returns Index Funds”. This compares the trailing returns over the last 1,2,3,4,5,6,7, and 8 years of 40+ index funds and their corresponding benchmarks. The return difference (fund return minus index return) is listed. Actual return differences are more intuitive than tracking errors. (2) The tracking error of these 30+ index funds over the last 1,2,3,4,5,6,7 and 8 years is also provided.
The tracking error is the standard deviation of the index fund minus index monthly return differences. The lower the tracking error, the more efficiently the fund follows the index. Unlike returns, tracking error data over multiple durations is hard to find. Also, many investors do not seem to appreciate that the tracking error depends on the duration. This screener hopes to change that.
We have already pointed out that lower expenses do not mean lower tracking errors while selecting index funds! With the TER of index funds starting to fluctuate, return differences are a better way to choose or track index funds.
How to use the Index fund tracking error screener?
Investors should not look for funds with the lowest tracking error or lowest return difference. That would be too narrow. Instead, they should focus on funds consistently in the top 5 or even the top 10 in low tracking error and/or return differences.
Cast a broad net and choose one. Monthly updates of this screener will tell you how the tracking error has worsened after a TER increase.
This is a screenshot of the file. The top and bottom panels represent the two sheets available.
- If this quantity is positive, then the fund has outperformed the benchmark! This is typically a red flag. I would avoid such funds.
- The tracking error is always positive, and you can screen by the lowest tracking error.
- The fund return minus index return requires some attention. Some examples are given below.
| Fund | index | fund return minus index return | Notes |
| 0.80% | 1% | -0.20% | ok |
| -0.80% | -1% | 0.20% | not ok |
| -1.20% | -1% | -0.20% | ok |
| -3% | -1% | -2.00% | not ok |
The user must look for funds with a return difference greater than, say, -2% and less than 0%. This can be accomplished with the Excel filter shown below.
This is summarized in this video
What about ETFs? It is quite easy and tempting to compute the tracking error of ETFs with their NAV. However, this can be seriously misleading because their price and not NAV determine ETF returns.
So, ETF tracking should be done with price data and not NAV. Everyone uses NAV for computing returns and tracking ETF errors, which is useless for investors.
Our ETF tracker-based ETF price and ETF NAV is now available! The freefincal ETF tracking error screener.
Get the Index fund tracking error screener!
- This screener costs Rs. 111 and is meant for personal use only. The cost is only for the current month and the data in the sheet.
- Inside, you get discounted links to our two courses: How to get people to pay for your skills (aka earn from skills) and the lectures on goal-based portfolio management.
- While freefincal will do its best to publish updated screener sheets each month, it cannot guarantee it.
- The file contains no buy or sell recommendations and only has the abovementioned data.
- Enough care and effort have been put in to weed out errors. However, we cannot guarantee that the sheet is free of error.
- The buyer will have to research using the information in the spreadsheet. No recommendations or assistance are included in the sheet and will not be provided separately.
- We will not provide any further help or assistance in using the sheet.
- The sheet purchased is for personal use and should not be shared privately or publicly.
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Dr M. Pattabiraman(PhD) is the founder, managing editor and primary author of freefincal. He is an associate professor at the Indian Institute of Technology, Madras. He has over ten years of experience publishing news analysis, research and financial product development. Connect with him via Twitter or Linkedin, or YouTube. Pattabiraman has co-authored three print books: (1) You can be rich too with goal-based investing (CNBC TV18) for DIY investors. (2) Gamechanger for young earners. (3) Chinchu Gets a Superpower! for kids. He has also written seven other free e-books on various money management topics. He is a patron and co-founder of “Fee-only India,” an organisation promoting unbiased, commission-free investment advice.
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