Evaluating the tracking performance and tracking error of New Zealand exchange traded funds

Purpose
The aim of this study is to examine the tracking performance and tracking error (TE) of New Zealand exchange traded fsunds (ETFs).
Design/methodology/approach
The authors use regression methods and cointegration analysis to examine tracking performance. Multivariate regressions are used to examine the determinants of TE.
Findings
At the daily frequency, the authors observe that the ETFs have substantially different exposures to their underlying indexes from what they should be, which is confirmed by cointegration analysis. At the monthly frequency, tracking performance improves but still shows significant differences between the ETF and its underlying index. When the authors examine the TEs of the ETFs, the authors observe that these are substantial and that there is considerable variation in TE. Regression analysis shows that both characteristics of the ETF and the constituents of the index the ETF tracks, as well as the volatility of the underlying benchmark are determinants of the TE of the ETFs.
Originality/value
This is the first study to examine New Zealand-based ETFs. The findings contribute to understanding the performance of these ETFs and are of relevance to academics, investors and the ETF provider.