Most of us have come to assume that ETFs do a pretty good job of tracking their indexes, and we do not worry much about it. Maybe we should.
According to The Wall Street Journal, a recent study from Morgan Stanley shows that in 2009 ETFs more than doubled their tracking error rates over 2008, to an average miss of 1.25% versus 0.52% a year earlier. While the average error doubled, it is still so small that it made us wonder if it could possibly be that small for alternative energy ETFs.
In our article entitled, “A Guide to Investing with Green ETFs”, we identified a dozen alternative energy ETFs covering various angles of the market. For our accuracy test we picked three Index/ETF pairs representing the broader U.S. markets, the broader global markets, and the specialized solar segment. The 2009 returns and tracking errors are as follows:
| Ticker | Name | 2009 | Tracking |
INDEX | ECO | WilderHill Clean Energy Index | 28.94% | 0.07% |
ETF | PowerShares Wilder Clean Energy Portfolio | 29.01% |
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INDEX | NEX | WilderHill New Energy Global Index | 40.91% | -3.10% |
ETF | PowerShares Global Clean Energy Portfolio | 37.81% |
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INDEX | SUNIDX | MAC Solar Energy Index | 22.38% | -5.50% |
ETF | Claymore/MAC Global Solar Energy Index ETF | 16.88% |
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The PBW fund fared best by outperforming its index by some 0.07%. The shortfall of the global funds is getting into meaningful numbers. It is worth pointing out that these numbers use the NAVs calculated by the fund companies and that looking at the actual price performance of the ETFs can show some wider tracking errors. For example, the 2009 price performance of PBD was actually 31.80%, versus 40.91% for the index it tracks. We know that over time the tracking errors could go in both directions, but the magnitude of these misses makes us wonder what some of these funds actually invest in, apparently not in the stocks that constitute the indexes.
When it comes down to alternative energy investments, these findings reinforce our preference for selecting and trading individual stocks over ETFs attempting to mimic indexes. For those who prefer to stick with the expediency and simplicity of ETFs, buyer beware!
Disclosure: No positions.
