ETF základy
S&P 500 Replication: Why Different Funds Have Slightly Different Returns
Key takeaways
- Tracking difference is the gap between an ETF's return and its benchmark index return for a given year.
- A low TER does not guarantee a low tracking difference — a fund can achieve a better return than the index through securities lending.
- Physical replication holds actual shares; synthetic uses swaps and can be more tax-efficient.
- To compare funds, look at tracking difference over multiple years, not just TER.
- Irish UCITS ETFs on S&P 500 benefit from the US-Ireland tax treaty — 15% vs. 30% withholding tax on US dividends.
Two ETFs tracking the S&P 500 may have slightly different annual returns — and yet both copy the same index. This is not an error, but a result of differences in replication method, tax treatment, and management efficiency.
What is tracking difference?
Tracking difference (TD) is the gap between an ETF's return and its benchmark index return for a given year. If the S&P 500 index rises 10% and the ETF rises 9.8%, TD is −0.2%. Tracking difference is a more accurate metric than TER — it includes all costs and benefits, including securities lending income. Tracking error then measures the consistency of tracking — how much TD fluctuates from year to year.
Physical vs. synthetic replication
Physically replicated ETFs hold the actual shares from the index — either all of them (full replication) or a representative sample (sampling). Synthetic ETFs instead enter into a swap with a bank, which commits to paying the index return.
- Physical replication: transparent, comprehensible, slightly higher trading costs
- Synthetic replication: can be more tax-efficient, carries small counterparty risk
The tax factor: Irish domicile
Irish UCITS ETFs on US equities benefit from the US-Ireland tax treaty — they pay 15% withholding tax on US dividends instead of the standard 30%. US-domiciled funds (not registered as UCITS in the EU) have a disadvantage from a European investor's perspective. Why Irish domicile matters is discussed in the article why UCITS ETFs with Irish domicile.
How to compare funds properly
Do not compare ETFs solely by TER. Focus on tracking difference over the last 3–5 years, fund size (AUM), replication method, and domicile. A detailed guide is in the article how to compare two similar ETFs.
This is not investment advice.
FAQ
What is tracking difference and why is it important?
Tracking difference is the gap between an ETF's return and the index's return for a year. It shows the actual total cost (or benefit) of the fund. It is more accurate than TER because it also includes securities lending income and tax effects.
Why do Irish ETFs have an advantage over US-domiciled ones?
Irish UCITS ETFs pay only 15% withholding tax on US dividends thanks to the US-Ireland tax treaty, while other domiciles pay 30%. This advantage directly translates into a higher tracking difference — better real returns for the investor.
How do I identify a quality S&P 500 ETF?
Look for low tracking difference over multiple years, large assets under management (above €5 billion), Irish domicile (ISIN starting IE), and physical replication. A TER below 0.20% is a good baseline, but TD is more important.