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European Bond ETFs: Tracking Errors and the Sovereign Debt Crisis


  • The authors are grateful to three anonymous referees and John Doukas (the editor) for valuable comments. We thank Sergey Gelman, Drago Indjic, Miles Kumaresan, Carsten Sprenger, Felix Goltz, Chien-Hui Liao, Jose Garcia-Zarate, and Florian Bitsch, participants at the European Financial Management Symposium on Alternative Investments, Toronto (April, 2011), and seminars at the ICEF- Moscow (May, 2011) and National Bank of Serbia (June, 2011) for their valued input. Mikica Drenovak and Branko Urošević gratefully acknowledge the support of the Serbian Ministry of Science and Technology, Grant OH 179005. The views presented in this paper are those of the authors and do not necessarily represent the views of our respective institutions.


This study examines the tracking performance of 31 eurozone sovereign debt exchange traded index funds (ETFs) during 2007–2010. The tracking performance is assessed by four different tracking error models. Overall, funds underperform their respective benchmarks. Active returns (net of fees) vary substantially (from +46.74 to −30.36 basis points) and are of considerable economic interest. The significant differences in the performance of swap-based and in-kind funds highlight the importance of appropriate (e.g. correlation vs. cointegration based) metrics required for the assessment of funds adopting different replication methods. We also document important changes in the tracking performance due to the changing characteristics of EU sovereign bonds since the start of the sovereign debt crisis.

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