The table below shows the tracking error of Canadian bond and commodity ETFs in 2010.
To make sure you understand these numbers in their proper context, see my earlier post on tracking errors for Canadian equity ETFs.
| Fund | Index | Tracking | |||
| Broad bond market | Ticker | return | return | error | |
| iShares DEX Universe Bond | XBB | 6.4% | 6.7% | -0.4% | |
| TD Canadian Bond index – e-Series | TDB909 | 6.4% | 6.7% | -0.3% | |
| TD Canadian Bond index – I-Series | TDB966 | 6.0% | 6.7% | -0.7% | |
| BMO Aggregate Bond | ZAG | 5.1% | 5.4% | -0.2% | |
| Claymore Advantaged Canadian Bond | CAB | 5.2% | 6.2% | -1.0% | |
| iShares DEX Long Term Bond | XLB | 12.1% | 12.5% | -0.4% | |
| iShares DEX Short Term Bond | XSB | 3.2% | 3.6% | -0.3% | |
| Government bonds | |||||
| iShares DEX All Government Bond | XGB | 6.1% | 6.5% | -0.5% | |
| Claymore 1-5 Yr Laddered Gov’t Bond | CLF | 3.3% | 3.5% | -0.2% | (1) |
| BMO Short Provincial Bond | ZPS | 3.5% | 3.8% | -0.3% | |
| BMO Short Federal Bond | ZFS | 2.9% | 3.2% | -0.3% | |
| BMO Long Federal Bond | ZFL | 5.7% | 5.9% | -0.1% | (2) |
| BMO Emerging Markets Bond * | ZEF | 8.5% | 9.1% | -0.6% | (2) |
| Corporate bonds | |||||
| iShares DEX All Corporate Bond | XCB | 6.6% | 7.3% | -0.8% | |
| Claymore 1-5 Yr Laddered Corp Bond | CBO | 3.8% | 4.0% | -0.2% | |
| BMO Short Corporate Bond | ZCS | 3.9% | 4.3% | -0.4% | |
| BMO Mid Corporate Bond | ZCM | 5.8% | 6.1% | -0.3% | (2) |
| BMO Long Corporate Bond | ZLC | 10.7% | 11.5% | -0.8% | (2) |
| Real-return bonds | |||||
| iShares DEX Real Return Bond | XRB | 10.6% | 11.1% | -0.5% | |
| BMO Real Return Bond | ZRR | 7.0% | 7.2% | -0.2% | (2) |
| Commodities | |||||
| Claymore Gold Bullion | CGL | 26.6% | 29.2% | -2.7% | (3) |
| Horizons BetaPro COMEX Gold | HUG | 26.8% | 28.6% | -1.8% | |
| Horizons BetaPro COMEX Silver | HUZ | 77.2% | 81.6% | -4.4% | (4) |
| Horizons BetaPro NYMEX Crude Oil | HUC | 4.8% | 8.0% | -3.2% | |
| Horizons BetaPro NYMEX Natural Gas | HUN | -37.6% | -36.3% | -1.3% | |
| Claymore Natural Gas Commodity | GAS | -49.8% | -48.2% | -1.6% | |
Notes:
1. The 3.3% return of CLF is based on the fund’s net asset value (NAV). The return on market price was just 2.8% — a significant difference. With bonds so unpopular these days, the forces of supply and demand may have driven down the price of this fund.
2. Several of BMO’s bond ETFs launched in 2010, so these returns do not cover a full year.
3. CGL’s return based on market price was 29.12%, two and a half percentage points higher than its return based on NAV, and only eight basis points off the spot price of gold. Just as an aversion to bonds seems to have lowered CLF’s price, the continuing gold mania helped this ETF trade at a premium in 2010.
4. Silver was the big winner of 2010 and investors in the Horizons BetaPro COMEX Silver ETF would have been dancing in the streets with their 77% return. But the large tracking error here shows that precious metals ETFs using futures contracts (as opposed to those that hold gold or silver bullion) can carry significant frictional costs. They may not closely track the spot price of the commodity.
Postscript. Horizons ETFs sent me this response regarding HUZ: “The tracking error is primarily due to the fact that the silver futures contracts are priced in U.S. dollars and HUZ doesn’t hedge intraday currency fluctuations; HUZ rebalances the FX hedge at the end of the day. We believe this accounts for most of the 4% difference in the performance of the ETF versus the performance of its index. Please keep in mind that any ETF, whether it is physically backed or futures-backed, will likely be subject to this currency differentiation.”