I regularly review fact sheets of the mutual funds I invest in. I take note of some metrics to keep track of the funds’ health and performance. Starting this month, I have started noting down tracking differences of index funds.
3 years tracking difference of some popular index funds:
- HDFC Nifty 50: 0.31 pp (percentage points)
- UTI Nifty 50: 0.42 pp
- Motilal Oswal Nifty 500: 1.36 pp
I was a little disappointed to see these numbers since Motilal Oswal Nifty 500 is the fund I have chosen for my portfolio. Looking at these numbers, predictions of the Motilal Oswal fund not being able to closely track its index seemed to have come true.
The linked article says that tracking 500 stocks will be more difficult than tracking 50 stocks due to impact cost and other overhead. It goes on to recommend that investors stick to Nifty 50 index funds.
If tracking 500 companies has such an impact, I wondered, what the story will be for funds that track thousands of companies? So I looked at 2 Vanguard ETFs tracking global indices. Despite holding thousands of stocks, these funds had incredibly low tracking differences.
| Fund name | Stocks held | 3 years tracking diff. |
|---|---|---|
| HDFC Nifty 50 | 50 | 0.31 pp |
| UTI Nifty 50 | 50 | 0.42 pp |
| Motilal Oswal Nifty 500 | 500 | 1.36 pp |
| Vanguard All-World (VWRA) | 3700+ | 0.10 pp |
| Vanguard Total World Stock (VT) | 9800+ | 0.52 pp |
This busts the theory that tracking more companies will always lead to a higher tracking difference. A competent fund manager like Vanguard can replicate large indices without deviating too far away from the index.
This made me think of the Jio-BlackRock joint venture that is expected to launch mutual funds in the near future. BlackRock’s iShares MSCI World ETF had managed a 3-years tracking difference of -0.47 pp despite holding a large portfolio of stocks. A Nifty 500 fund run by BlackRock would likely have a low tracking difference, I thought. Then I discovered iShares MSCI India ETF, so I looked at this ETF’s tracking difference.
Takeaways for me:
- While Motilal Oswal Nifty 500 has a mildly high tracking difference, it’s not that bad. There are worse options out there.
- BlackRock coming to India need not be as amazing as some hype it up to be. We have to wait and see how they are able to perform.
- Finally, some Nifty 50 index funds also have high tracking differences. NiftyBeES, India’s most popular Nifty 50 ETF, has a tracking difference of 0.98%. ABSL Nifty 50 and DSP Nifty 50 funds have tracking differences of 1.32 pp and 1.22 pp respectively. Compared to that, Motilal Oswal Nifty 500’s 1.36 pp is very respectable.
Are these tracking differences (for 3 years) you mentioned in absolute (%) or CAGR (%)? And did you refer to the direct versions (vs regular versions) for all these funds?
ReplyDeleteThe numbers for at least Motilal Oswal NIFTY 500 seem off at a glance to me: https://www.amfiindia.com/research-information/other-data/tracking_errordata
PS: Motilal Oswal Nifty 500 dropped it's expense ratio significantly recently, which may reduce the tracking difference going ahead.
I didn't know AMFI had a page showing tracking differences. Thank you for sharing that link! April fact sheet of MO Nifty 500 quotes 19.16% as the fund return while their website and AMFI data considers 19.97% as the fund return. One of the 2 is wrong, but I am not sure which one is. When comparing NAVs, I see that 19.97 is the correct CAGR.
DeleteTo answer your questions, I invest in, and track, Direct Growth schemes only. Tracking differences of overseas ETFs (Vanguard and iShares) are in absolute terms while Indian funds are in annualised rate. It's apples to oranges comparison, but I just used the number I found on their web sites. 😬
I see, I was just suprised by the numbers since I did a similar analysis recently and the Motilal Oswal fund seemed to be doing pretty good to me then.
DeleteTheir fund website also quotes tracking differences which roughly matches the numbers on AMFI: https://www.motilaloswalmf.com/mutual-funds/motilal-oswal-nifty-500-index-fund