Assessing Tracking Risk of ETFs in India - An Empirical Study on Selected Index ETFs

Abstract

One of the significant financial innovations, which has attracted the maximum attention of investors in recent times because of its manifold advantages, is the Exchange Traded Funds (ETFs). The prime reason for ETFs being so popular is their so called ability to replicate the performance of the underlying. However, do they really track the underlying effectively? Recent studies across the world have raised serious doubt over the so called belief. The present study attempts to unearth the answer to this question in Indian context by analyzing the tracking risk of 11 Index ETFs for a sample period from 1.1.2011 to 31.12.2015. The study finds, against the common belief, that Indian Index ETFs do possess significant tracking risk which can be a potential deterrent for its future growth.