An Evaluation of Tracking Error on World Indices ETFs Traded in India

Harsh Purohit, Nidhi Choudhary and Parul Tyagi

The IUP Journal of Applied Finance, 2014, vol. 20, issue 3, 41-52

Abstract: The Exchange Traded Funds (ETFs) are relatively new products in the Indian capital market, gaining popularity among investors in India. ETF has opened investment opportunities for retail as well as institutional investors. The investors have the option to expose their portfolio to overseas stock market and sector-specific market instruments through ETF and this opportunity comes with several benefits like lower cost, real-time investment and easy accessibility as compared to other instruments in the market. The ETF on the index of foreign country is one of the latest instruments in the Indian market. But such ETFs suffer from Tracking Error, whereby there is a difference between the mean return on ETFs and mean return on its underlying asset. The proposed study is an attempt to quantify this error using the methodology prescribed by the NSE and then evaluating its impact on the investments.

Date: 2014
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