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I am looking at the following ETF : NDQ (in ASX exchange). It is an ETF that tracks the Nasdaq and is traded in the ASX (Australia). It is NOT currency hedged against the USD.

On the 9 Jan 2019, Nasdaq closed with a gain of .87%. When the market opened in Australia the NDQ was actually down by .4 % (the Nasdaq futures at the same was pretty much unchanged since the last close). Large volumes of trade has happened for the NDQ etf, so liquidity would not be an issue.

What is causing NDQ to be down where I am expecting it to be up ?

  • 1
    are you asking about today (9 Jan 2019) or really about 9 years ago, which was a Saturday with the markets closed? – Ben Voigt Jan 10 at 2:46
  • @BenVoigt You are correct, it should be 9 Jan 2019 – fahmi Jan 10 at 23:47
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The answer is not complicated, the ETFs that track indexes are not the indexes themselves. The ETF is trying to emulate the same returns as the index but often does not hold every stock in the index, therefore sometimes creating a disparity between the index and ETF. Further, even if the ETF holds all the same stocks as are on the index, the weight of those stocks changes constantly and the ETF may not be balanced in the same way.

This is all true for regular, same-market ETF/index pairs, and I can only imagine that currency hedging activities and exchange rate fluctuations also limit the ability of ETFs to precisely track a certain index. The more factors at play in funds with so many moving parts already, the less accurate you're bound to be.

It is worth noting as well that ETFs are almost always bot-traded and not meant to be doing better than or worse than the market the larger and more sophisticated a fund is, the more likely they will be able to accurately mirror the index.

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An ETF is essentially a fund that buys and sells stocks to try to mirror the performance of the basket it is trying to track. NDQ is a Betashares fund. Here’s how they describe ETFs:

An ETF is an open-ended investment fund, similar to a traditional managed fund, that is traded on the ASX – just like any share. ETFs aim to closely track the performance of a given index or asset class, and provide the returns of that index or asset class – less any fees. - Betashares

There are various factors at play. Here are a few of them:

  • The fund charges fees that are not reflected in the underlying index.
  • The fund might not fully mirror the underlying basket at any given time. They only try to mirror the performance of the underlying basket; the make-up of their actual holdings might not be identical to the basket at any given time.
  • The ETF and the index trade at different times, so investor sentiment regarding the underlying shares might move the ETF at a time when the stock exchange for the underlying shares isn’t open for trading.
  • The costs of the fund buying and selling its underlying shares affect the ETF but not the underlying index.

These and other factors mean that despite best efforts, ETFs that actually trade the underlying shares can’t be expected to precisely mirror the performance of their tracked basket.

  • 1. Two of these points (fees, costs) should cause the ETF to have worse performance than the underlying index. But actually this index appears to have outperformed its index (depending how you chart it). – The Photon Jan 10 at 3:07
  • 2. If the ETF's holdings don't match the target index, is there any way for an investor to know that? (Or can institutional investers know it but retail investors not)? – The Photon Jan 10 at 3:08
  • @ThePhoton On #1, this answer addresses the OP's main question about the ETF not tracking the index. The various factors may contribute positively or negatively to the ETF price. Consistently negative factors such as management fees would need to be managed within the fund so that the net result is an attempt provide what they claim. Having a small fee doesn't necessarily doom the fund as a whole to always trail the index. – Lawrence Jan 10 at 4:03
  • @ThePhoton On #2, I don't work at Betashares, but this page (link) posts the "portfolio holdings" for the NDQ ETF, together with percentage holdings. Incidentally, cf #1, the page currently shows that the ETF returns after fees trail the index at all published time periods. – Lawrence Jan 10 at 4:05

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