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XUU tracking error

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[OP]
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Dec 31, 2018
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XUU tracking error

I was listening to the Rational Reminder podcast today and they mentioned that in their soon to be released model portfolios, PWL will swap XUU for VUN for their US component due to the large tracking error of XUU, despite its lower MER.

As someone who owns XUU as part of my index strategy, this got my attention. On the BlackRock Website, it shows that the annual return for XUU for the last year was 14.12, whereas the benchmark was 15.42. This is a huge tracking error. Does anyone else know what is going on here, and if this will persist? If i look at the 5 year record, they are almost identical to the benchmark.

I really don't want to have to change from XUU to VUN as staying put and not tinkering is a hallmark of my investing strategy but if there's reason to believe this will persist, maybe it's better to make the move?
19 replies
Deal Fanatic
Aug 17, 2008
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DK what you know or don't know, but here is a learning opportunity.

You need to do more of your own DD on the ETFs. A simple read of the Blackrock and Vanguard ETF websites explained one clear difference right off the bat. DK what the podcast said, but this is a case of Apples vs Oranges. Concentrate on the "US Total Market Index" measure.

I'll save you some work as I still have them open.

https://www.blackrock.com/ca/investors/ ... -index-etf
https://www.vanguardcanada.ca/advisors/ ... 557/equity

Not sure why people believe everything they read or here, but have a look here too. Ask yourself, why this is. https://stockcharts.com/freecharts/perf ... 0&O=011000
[OP]
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Dec 31, 2018
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MrMom wrote: DK what you know or don't know, but here is a learning opportunity.

You need to do more of your own DD on the ETFs. A simple read of the Blackrock and Vanguard ETF websites explained one clear difference right off the bat. DK what the podcast said, but this is a case of Apples vs Oranges. Concentrate on the "US Total Market Index" measure.

I'll save you some work as I still have them open.

https://www.blackrock.com/ca/investors/ ... -index-etf
https://www.vanguardcanada.ca/advisors/ ... 557/equity

Not sure why people believe everything they read or here, but have a look here too. Ask yourself, why this is. https://stockcharts.com/freecharts/perf ... 0&O=011000
I don’t understand what you are getting at or how this is apples vs oranges? They are both US total market etfs listed on the Canadian exchange. I realize they follow different benchmarks, which is not the point here. What I was wondering why XUU is so badly trailing it’s own benchmark.
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Jul 1, 2007
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The CRSP Total Market index has simply outperformed the S&P Total Market, I guess. Don't know what kind of methodology S&P's is based on, but the first thing I noticed in the holings was that TSLA is only the 61st largest holding, while in VTI (the sole holding of VUN), it's #7. Could be enough to make that difference.

If that's the case, then Vanguard's index is a better index to be following, as TSLA at today's valuation has no business being 61st. Switching from XUU to VUN though would be stupid at this time, as you've already missed all that growth.

Couple years back everyone was talking about switching from VUN to XUU, because XUU isn't a fund of fund, and this led to a fraction of a percent tax-efficiency in an RRSP. Now switching from XUU to VUN because it tracks a slightly better index. You all gotta stop doing this to yourselves over a couple dozen basis points. I doubt Cam and Ben are changing all their clients from one to the other; they're just trying to guide people with new money into the better ETF. If new money, go with VUN. If you're alread in XUU, stick with it and worry more about saving more and your financial plan than a few dozen basis points (I know 150bps is a lot, but that's in the past now).
Money Smarts Blog wrote: I agree with the previous posters, especially Thalo. {And} Thalo's advice is spot on.
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Oct 4, 2009
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Thalo wrote: Couple years back everyone was talking about switching from VUN to XUU, because XUU isn't a fund of fund, and this led to a fraction of a percent tax-efficiency in an RRSP.
XUU is very much a fund of funds and even if it wasn’t it wouldn’t make a difference. Methinks you are confounding funds or those involved in the discussion didn’t properly understand the issue.
[OP]
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Dec 31, 2018
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Thalo wrote: The CRSP Total Market index has simply outperformed the S&P Total Market, I guess. Don't know what kind of methodology S&P's is based on, but the first thing I noticed in the holings was that TSLA is only the 61st largest holding, while in VTI (the sole holding of VUN), it's #7. Could be enough to make that difference.

If that's the case, then Vanguard's index is a better index to be following, as TSLA at today's valuation has no business being 61st. Switching from XUU to VUN though would be stupid at this time, as you've already missed all that growth.

Couple years back everyone was talking about switching from VUN to XUU, because XUU isn't a fund of fund, and this led to a fraction of a percent tax-efficiency in an RRSP. Now switching from XUU to VUN because it tracks a slightly better index. You all gotta stop doing this to yourselves over a couple dozen basis points. I doubt Cam and Ben are changing all their clients from one to the other; they're just trying to guide people with new money into the better ETF. If new money, go with VUN. If you're alread in XUU, stick with it and worry more about saving more and your financial plan than a few dozen basis points (I know 150bps is a lot, but that's in the past now).
I don’t know why some are confused by my question. I’m not comparing the performance of the two indexes as I know their composition is not the same. I’m questioning why the performance of XUU is so far off it’s own benchmark. It’s not common for a etf to be lagging by 1+%.
[OP]
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Dec 31, 2018
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S5 wrote: XUU is very much a fund of funds and even if it wasn’t it wouldn’t make a difference. Methinks you are confounding funds or those involved in the discussion didn’t properly understand the issue.
Exactly. It is a fund of funds plus that wouldn’t make a defence in terms of withholding taxes because it’s US stocks wrapped in a US funds, so you don’t get hit twice in terms of withholding taxes. Something like XEC you do because it’s international stocks wrapped in a US fund.
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Aug 5, 2007
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TBH you might get a straighter answer from the RR community where Ben has answered a few questions that have come up about XUU and XEC.
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Jul 1, 2007
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TrickleDownEconomics wrote: I don’t know why some are confused by my question. I’m not comparing the performance of the two indexes as I know their composition is not the same. I’m questioning why the performance of XUU is so far off it’s own benchmark. It’s not common for a etf to be lagging by 1+%.
I thought MrMom's links showed that XUU is in fact tracking its index, but it's a worse-performing index.

I was looking at the wrong data for XUU's holdings (Morningstar for some reason shows underlying stocks, implying it's not a fund of funds, doesn't show it the same way as VUN, where it only shows VTI as a holding). Now that I look at the Blackrock site, it's pretty much 100% obvious why it underperformed. Quite simply, it isn't a total market ETF the same way that VUN is. VUN owns VTI and nothing else. XUU owns 42% ITOT, and with the rest of the portfolio tries to replicate "all cap" via mostly IVV, with some mid and small cap. They probably learned now that this is an ineffective way because IVV excluded TSLA and other large cap growth stocks that are/were arbitrarily excluded from the S&P500 (ex: Zoom).

So there's the answer regarding performance. New investors: avoid XUU, it's not really a true total market ETF because it still is affected by S&P's arbitrary exclusions. Investors already in XUU: you already missed the big growth stocks this year and this explains the drag. You won't get it back by switching horses now.
Money Smarts Blog wrote: I agree with the previous posters, especially Thalo. {And} Thalo's advice is spot on.
[OP]
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Dec 31, 2018
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Thalo wrote: I thought MrMom's links showed that XUU is in fact tracking its index, but it's a worse-performing index.

I was looking at the wrong data for XUU's holdings (Morningstar for some reason shows underlying stocks, implying it's not a fund of funds, doesn't show it the same way as VUN, where it only shows VTI as a holding). Now that I look at the Blackrock site, it's pretty much 100% obvious why it underperformed. Quite simply, it isn't a total market ETF the same way that VUN is. VUN owns VTI and nothing else. XUU owns 42% ITOT, and with the rest of the portfolio tries to replicate "all cap" via mostly IVV, with some mid and small cap. They probably learned now that this is an ineffective way because IVV excluded TSLA and other large cap growth stocks that are/were arbitrarily excluded from the S&P500 (ex: Zoom).

So there's the answer regarding performance. New investors: avoid XUU, it's not really a true total market ETF because it still is affected by S&P's arbitrary exclusions. Investors already in XUU: you already missed the big growth stocks this year and this explains the drag. You won't get it back by switching horses now.
Right right, that makes sense, thanks.

I wonder why XUU even has the S/P component at all (IVV), and why don't they just include ITOT as the entire holding? ITOT is the BlackRock US total market ETF, which would be a better approximation of VUN/VTI.
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Feb 1, 2012
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Don't know the answer, but it's only recently that the tracking error of XUU has become so bad. If you look at the performance vs benchmark over 5 years and since inception it's quite good.

As someone else mentioned you could post something on the RR community discussion board (although I think you need an account to post there).

And all these years I have been lamenting being stuck with large capital gains on VUN in my non-reg account.Smiling Face With Sunglasses
I solemnly swear, to never assume I have an inkling at which direction the market will head, and to never make any investments based on a timing strategy.
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Oct 4, 2009
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TrickleDownEconomics wrote: Right right, that makes sense, thanks.

I wonder why XUU even has the S/P component at all (IVV), and why don't they just include ITOT as the entire holding? ITOT is the BlackRock US total market ETF, which would be a better approximation of VUN/VTI.
XUU initially held no ITOT at all. They likely can’t switch to it entirely without realizing substantial capital gains on the initial IVV/IJH/IJR holdings.

Not sure how much of a problem this is really, long term. Until recently XUU was trouncing its index since inception. Funny how no one complains when that happens.Smiling Face With Open Mouth And Smiling Eyes
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Aug 4, 2014
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S5 wrote: Not sure how much of a problem this is really, long term. Until recently XUU was trouncing its index since inception. Funny how no one complains when that happens.Smiling Face With Open Mouth And Smiling Eyes
People always complain about something 🤪
And finally, why are XUS's supposed S&P 500 benchmark returns different from all the others? And given it's superior performance vis-a-vis ZSP and VFV, shouldn't it be recommended more often here?
US Market ETFs in Canada-Why the Difference in Tracking Error with US Counterparts? (April 2016)
Deal Fanatic
Jul 1, 2007
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S5 wrote: XUU initially held no ITOT at all. They likely can’t switch to it entirely without realizing substantial capital gains on the initial IVV/IJH/IJR holdings.

Not sure how much of a problem this is really, long term. Until recently XUU was trouncing its index since inception. Funny how no one complains when that happens.Smiling Face With Open Mouth And Smiling Eyes
They probably initially thought "this'll work" using just IVV and the small/mid cap. Perhaps it's only in recent years they realized such high profile exclusions (not yet profitable but super massive growth companies) would impact them so.
Money Smarts Blog wrote: I agree with the previous posters, especially Thalo. {And} Thalo's advice is spot on.
Sr. Member
Jan 13, 2016
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Vancouver, BC
Tesla may crash at some point anyways as its overvalued. I'm annoyed as this affects XEQT as well and i was planning to hold xeqt in tfsa and veqt in rssp.

Actually good news.XEQT holds ITOT so i don't think it s affected.
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Latebuyer wrote: Looks like tesla has been added to s&p 500

https://www.theguardian.com/technology/ ... hare-index

so maybe this won't be a problem anymore?
The problem is that while true total market funds like VUN (via its underlying VTI) owned TSLA all along on the way up, S&P 500 funds and not-quite-total-market funds like XUU are now in a position where they're forced to purchase TSLA at a premium. On Friday some trades of TSLA went through as high as $695 (well over trading range for the day) and I wouldn't be surprised if it was a sloppy execution by an index fund somewhere.
Money Smarts Blog wrote: I agree with the previous posters, especially Thalo. {And} Thalo's advice is spot on.
[OP]
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Thalo wrote: The problem is that while true total market funds like VUN (via its underlying VTI) owned TSLA all along on the way up, S&P 500 funds and not-quite-total-market funds like XUU are now in a position where they're forced to purchase TSLA at a premium. On Friday some trades of TSLA went through as high as $695 (well over trading range for the day) and I wouldn't be surprised if it was a sloppy execution by an index fund somewhere.
S/P500 did have a bit of a rougher time this year because of Tesla and whatever else growers they excluded initially.

Interestingly, TDB902 (which follows the Solactive US Large Cap Index as TD switched indexes in late 2019) did 17.55% YTD according to Morningstar whereas XUS (which follows the S/P500) did 14.62%. Obviously I wouldn't expect the gap to be this huge every year but it is quite a gap this year.

According to their website, the Solactive US Large Cap Index aims to track the price movements of the 500 largest companies in the American stock market based on free float market capitalization, but perhaps they are not as 'active' as the S/500 with the latter index's other criteria.
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Oct 4, 2009
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Upthread I said XUU had trounced its index until this year. This is a clever illusion by the Blackrock folks who seem to be shading their benchmarks down.

This is quite obvious to see by looking at the S&P500 funds of several ETF providers and their 1 year quoted “benchmark” performance to end of November.
BR (XUS) 13.96%
VG (VFV) 14.52%*
BMO (ZSP) 14.6%
HRZ (HXS) 14.76%

No way all these fund companies should be using different benchmark returns to measure up against. Clearly Blackrock is being very shady, not even quoting the specific benchmark or why it’s so low, in hopes people will not notice and think their products are “beating their benchmark” when the benchmark is artificially low. It sure fooled me (initially) upthread and I would argue I’m a 0.01% percenter on this stuff.


*VG note: Effective August 4, 2020 the index methodology was revised to reflect a 15% foreign withholding tax in index performance. Index performance shown from December 1, 2016 has been updated to reflect this foreign withholding tax.
Sr. Member
Jan 13, 2016
535 posts
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I'm just wondering if it is advisable to invest in xaw if the tracking error problem still exists. Or would i be better off moving to xeqt?

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