Exchange-Traded Funds - Operations Tracking Profile

Most exchange-traded funds (ETF or ETFs) seek to closely track the return of a specific market or submarket index. The difference between the returns of an ETF and that of the benchmark index at the end of an investing period is referred to as “Tracking Difference”. “Tracking Error” is a representation of how well an ETF tracks its benchmark index during an investment period. It is calculated as the standard deviation of the Tracking Difference between the ETF return and its benchmark return.ETFs are presented as securities with the same trading, clearing, settlement, and market making features as listed equity securities. The CFA Institute Research Foundation A Comprehensive Guide to Exchange-Traded Funds (ETFs) notes:“…Confusion abounds about how ETFs work. Claims have even appeared in the popular press that somehow ETFs are a special class of securities subject to different rules when it comes to the back-office processes. Although ETFs are truly unique, the reality is that from the perspective of an investor buying them on the open market, they go through the same settlement and clearing process as any other stock listed on the US stock markets….” As such, the expectation is that operational outcome patterns for ETFs would not be different from the operational outcome patterns for listed equity securities. Available public fails-to-deliver data demonstrates ETFs have operational outcomes that differ from the operational outcome patterns for listed equity securities. These ETF operational outcomes are not recognized and recorded in ETF index tracking and performance results. Tracking the difference between ETF operations outcomes and that of a benchmark operations outcome over an operations period would supplement ETF index tracking and performance results, as well as highlight settlement liquidity volatility and levels