Many exchange-traded funds tracking indexes missed the mark last year. Coming a day after his Wall Street Journal report that ETFs are gaining popularity among retail investors, Ian Salisbury, in Friday's Fund Track column, follows up by highlighting new data from a Morgan Stanley released this week shows 54 ETFs showed "tracking errors" of three to ten percentage points.

The range of ETF tracking performance varied greatly in 2009, but in general, funds tracking "exotic investments" or foreign indexes, had greater trouble.

In 2009, the $40 billion iShares MSCI Emerging Markets Index ETF had a 71.8 percent return, falling 6.7 percentage points behind the 78.5 percent return on the index its benchmark by. The SPDR Barclays Capital High Yield Bond ETF had a return of 50.5 percent, compared to 63.5 percent on the index it tracks, falling behind by 13 percentage points.

However, many funds fared better. The SPDR, the largest ETF, lagged the S&P 500 by just 0.19 percentage points in 2009. And the $200 million Vanguard Telecom Services ETF actually beat its benchmark's 12.6 percent return by 17 percentage points. Salisbury does not note the 2008 results of any of the funds.

"Portfolio management is a balancing act," iShares portfolio manager Dina Ting told Salisbury. "Over the long term, we've delivered on our objectives." 

Edited by: Daniel Tovrov


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