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Assuming there two ETFs A and B from two different companies. Both have in their fact-sheet that they use the same index, physical replication, have the same TER, have the same currency, the same type of distribution and the the same rebalancing interval.

Is there any way one of them could be "better"? Is the company of B actually allowed to do something different/"smarter" than the company which manages B?

I tried to find two examples:

  • IE00B4L5Y983 : iShares Core MSCI World UCITS ETF USD (Acc)
  • IE00BJ0KDQ92 : Xtrackers MSCI World Index UCITS ETF 1C

What is the same:

  • Index: MSCI World
  • Replication: Physical
  • TER: 0.19% / 0.20% (for this question, please assume they are the same - I know that lower is better)
  • Currency: USD
  • Type of distribution: Accumulating
  • Rebalancing-Intervall: Quarterly
  • It seems odd that two MSCI World funds would use the S&P 500 as their benchmark. Are you mixing up two different examples? – D Stanley Jul 24 '19 at 20:56
  • @DStanley Yes! Thank you! I wanted to make another example but then saw that they were different in replication and currency. I fixed it. – Martin Thoma Jul 25 '19 at 5:22
  • If both portfolios are a replication of another, then expenses ratio of 0.19 is a win against 0.20 – mootmoot Jul 25 '19 at 7:10
  • The important difference is that some brokers "prefer" iShares over Xtrackers, and vice versa, and thus the transaction fees for one or the other will be lower at some discount brokers. – RonJohn Jul 25 '19 at 8:58
  • There could be the issue of the fund's location (which could lead to dividend leak), I assume by your example you talk about to American ETF's but that's not always the case. Also some ETF's lend some of their securities which increases risk. – Joel_Blum Jul 25 '19 at 13:34
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Sure it's possible. First of all, the MSCI World Index consists of over 1,600 securities, so it's unlikely that either fund holds all of them in the same proportions as the index. They likely hold a representative sample that is intended to track the index closely. So the funds could have significantly different holdings and could perform differently (better or worse) than their benchmark (this is called "tracking error").

One thing to look at is their historical returns and risk to see if one has performed better than the other in the past. This does not guarantee that it will be better in the future, but it might indicate a better selection process (or could just be luck).

That said, you'd have to have a LOT of tracking error to make a significant difference between the two. More than likely the difference is negligible.

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  • "so it's unlikely that either fund holds all of them" - that's interesting. So where does the freedom of the ETF manager stop? Where are they legally bound to have some values in it, if they say they follow this index. Is there a legal boundary for the tracking error? Can I see the tracking error over time somewhere? – Martin Thoma Jul 25 '19 at 6:58
  • I don't know of nay legal requirements, it's more of a reputational issue. If an index claims to track an index but has large tracking error, then it may be less appealing to investors. So fund managers must select their samples carefully to not skew the allocation too far in any direction. – D Stanley Jul 25 '19 at 13:44

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