Tracking error a ‘waste of time’: AltaVista

Tracking error a ‘waste of time’: AltaVista

Qualitative ETF research houses that focus on tracking error are ‘missing the wood for the trees’, according to AltaVista Research head of sales and corporate development Michael Turner.

Speaking to InvestorDaily, Mr Turner said AltaVista differs from its competitors in the ETF research space because it is dedicated to quantitative research – something other researchers merely “give lip service to”.

“As one views an equity, we view ETFs; as one views a single bond, we view fixed income ETFs,” he said.

“This is the approach that we take, and the depth to which we go. We look at every constituent of each and every ETF that we rate, and we capture all of that fundamental analysis,” said Mr Turner.

But tracking error – ie, the volatility of the return difference between an ETF and its underlying index over a given time period – is the last thing AltaVista looks at, he said.

“This is where the industry’s getting it wrong. I’m quite scathing of researchers who say ‘What about tracking error?’” said Mr Turner.

He cited Vanguard’s US emerging markets ETF VGE, which was recently listed on the ASX: “In [US] VGE there is nearly $50 billion in that one fund … tracking error on funds that are that large is just a waste of time,” said Mr Turner.

“The point is about analysing the exposure that an investor receives by investing into an ETF. That’s exactly what quantitative research delivers,” he said.

In addition, tracking error will always be low because the industry is “somewhat self-regulating”, said Mr Turner.

“If I start to deviate my portfolio from its dedicated index the first person that’s going to pick that up is my rival,” he said.

AltaVista recently added eight additional ETFs to its investment universe – meaning there are now more peer fund groupings which can make financial advisers more confident about using ETFs, said Mr Turner.

“So where there was just one emerging markets ETF, for instance, now there’s a competitive set of three,” he said.

“What we’re trying to do is get people to say ‘Let’s start looking under the bonnet of what an ETF is’,” he said.

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