Finally, let's not forget that even if you end up getting the timing right and the hedged ETFs
track their indexes perfectly, transaction costs and capital gains taxes can still take a significant bite out of your profits.
That means the fund managers not only
tracked the indexes perfectly, they even managed to add a little value, probably through activities such as securities lending and arbitrage.
Using fund data is more realistic, because funds charge fees, don't necessarily
track the indices perfectly, and have other implementation artifacts.
Not exact matches
We have
tracked energy costs through a few different Canadian
indices and they mirror the U.S. Department of Energy published data almost
perfectly.
The data assume that funds based on the RAFI
indexes would have
tracked their benchmarks
perfectly — and that's always a big assumption.
As such, an alpha of zero would indicate that the portfolio or fund is
tracking perfectly with the benchmark
index and that the manager has not added or lost any value.
The expectation is that the commodity
indexes will be correlated with commodity prices but may not
track them
perfectly.
For example, some ETFs use a derivative called a swap, which
tracks an
index indirectly, but
perfectly and cheaply.
This structure carries extra risk but has helped the ETF
track its
index almost
perfectly.
Index ETFs don't always
track the underlying asset
perfectly and may vary as much as a percentage point at any given time.