Exchange-Traded Funds Emerging vs. Developed Markets

Abstract

We compare tracking abilities between exchange traded funds focused on emerging and developed markets. Because the ETF is a relatively new financial instrument (first inception 1993), there is limited literature on the tracking abilities for ETFs focused on emerging and developed markets. Previous literature have shown a positive correlation between ETFs tracking errors and exchange rates, indicating that ETFs tracking foreign markets underperform ETFs tracking domestic markets. Our conclusion is that ETFs tracking developed markets exhibit lower tracking error than ETFs tracking emerging markets, with trading volume being the only factor affecting tracking error.