Tracking Error and Portfolio of Futures ETFs According to Futures Contracts Maturity

Abstract

Purpose - The purpose of this research is to confirm the tracking error of futures ETFs according to their portfolio weights with the most recent and next month’s maturity futures contracts. Design/Methodology/Approach - This research used futures indexes, futures contracts, ETF prices, and net asset value data of ETFs from the Fn Data Guide. Tracking error of futures ETFs, volatility, spread rate, and weight error variables were calculated from the data, and panel regression models from Hausman (1978) were used for empirical analysis. Findings - This research has two findings. First, the tracking error from D-3 (criterion: most recent maturity of futures contracts) to D-day (criterion: most recent maturity of futures contracts) was higher than the other trading days’ tracking errors. This is because the futures index is calculated with the most recent and next month’s maturity futures contracts, and the weight is different. Second, if the weight error between the most recent month’s maturity and next month’s maturity futures contracts is high in ETF portfolios, the tracking error is high. Research Implications - The results from the empirical analysis are as follows. When portfolio managers in futures ETFs do not adjust the futures contract weights between the most recent month’s maturity and next month’s maturity exactly, the tracking error is high. Therefore, managers should reflect the weight of the portfolio exactly.