Since the first index fund launched in 1999, the index fund market has been growing steadily in China. In this paper, we seek to measure and understand the tracking error of China based index funds. The results show that sample index funds exhibit an acceptable level of tracking error in general. Furthermore, by means of decomposition of tracking error variance we find that risk structure of sample funds keeps consistency with financial theory about indexing. While there is an exception such as Hua An MSCI China A share e.g., whole performance of the better run index funds suggests that indexing is practicable under China conditions.
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