What is the anticipated tracking error and how is it managed? | DGLO (Aug 07, 2025) | Candlesense
DGLO

What is the anticipated tracking error and how is it managed?

Answer – Tracking‑error expectations and management for the First Trust RBA Deglobalization ETF (DGLO)

The press release announcing the launch of the First Trust RBA Deglobalization ETF (ticker DGLO) does not contain any specific figure or quantitative target for the fund’s anticipated tracking error, nor does it detail the exact mechanisms the manager will employ to control that error.

Below is a concise, “what‑we‑know‑and‑what‑we‑don’t‑know” summary:

Aspect What the news release tells us What the news does not specify (or we can infer)
Stated tracking‑error goal The release only states that the ETF “seeks investment results that correspond generally to the price and yield (before the fund’s fees and expenses) of the RBA U.S. Deglobalization Index.” It does not quote a numeric tracking‑error target (e.g., â€œâ‰€â€Ż0.5 % annualized”). No explicit target (e.g., ≀ 0.5 % or ≀ 1 %); the language is typical for a “full‑replication” or “optimized‑replication” ETF but the exact figure isn’t disclosed.
Management approach The press release does not describe the methodology used (full replication, sampling, derivatives, etc.) or any specific risk‑management tools (e.g., cash‑drag, sector caps, liquidity buffers) that would be used to keep tracking error low. In most First Trust index‑based ETFs, tracking‑error is managed by:
1. Replication strategy – full or optimized replication of the underlying index constituents.
2. Cash management – holding a small cash buffer (typically 1‑2 % of assets) to handle inflows/outflows without having to sell securities at unfavorable prices.
3. Liquidity‑adjusted weighting – capping exposure to securities that have low daily trading volume to avoid market impact.
4. Rebalancing schedule – aligning the ETF’s rebalancing dates with those of the RBA index (usually quarterly) to minimize drift.
5. Derivatives/ swaps (if used) – to gain exposure to difficult‑to‑trade securities while limiting transaction costs and thus limiting tracking error.
Expense‑related impact The fund’s prospectus (not part of the news release) would normally list the total expense ratio (TER). The expense ratio is one component that contributes to tracking error, but the release does not disclose it. The actual expense ratio (e.g., 0.35 %–0.45 % annually) would be added to the “tracking error” when measured against the index’s performance.
Regulatory disclosures The announcement mentions the ETF “seeks investment results that correspond generally” — a standard disclaimer used to satisfy SEC disclosure requirements. It does not provide a quantitative tracking‑error threshold. The “standard of care” under SEC rules for ETF disclosures is to give investors a reasonable expectation of the fund’s ability to track the index, typically expressed as “expected tracking error of ≀ X %.” That language was omitted here.

Why the news does not specify the tracking error

  1. Pre‑launch communication – The Business Wire notice is a pre‑launch announcement that focuses on the strategic theme (deglobalization) and the unique positioning of the ETF. Detailed quantitative metrics (tracking‑error target, methodology, expense ratio) are usually disclosed later in the official prospectus and SEC Form N‑2 (for new ETFs). Those documents are filed after the press release but before the official launch date.

  2. Regulatory timing – The SEC requires that the prospectus contain the tracking‑error methodology and any performance‑related targets. The press release is not required to contain those details, and many ETF issuers choose to keep the press release short and “theme‑focused” to generate market interest.

  3. Standard practice – Many ETF sponsors (including First Trust) typically provide a target tracking error of ≀ 0.5 %–1 % for full‑replication equity ETFs, and ≀ 1 % for optimized‑sampling funds that need to use cash or derivatives. However, without the specific prospectus language we cannot definitively state the exact figure for DGLO.

How an investor can get the exact information

  1. Download the prospectus (the official ETF prospectus, filed on SEC Form N‑2). This document will list:

    • “Target tracking error: ≀ 0.5 % (annualized) for the first 12 months, and ≀ 0.75 % thereafter.” (or whatever the actual figure is).
    • The replication methodology (full replication vs. optimized sampling).
    • The expense ratio that contributes to the tracking error.

  2. Check the ETF’s website (First Trust’s ETF page for DGLO). There is usually a “Performance & Statistics” tab that displays:

    • Historical tracking error (past 30‑day, 90‑day, 12‑month) as a % of the index.
    • Benchmark comparison that shows how closely the fund has matched its index since inception.

  3. Read the “Fund Overview” in the prospectus’s “Investment Objectives & Policies” section. It will specify the rebalancing frequency, cash‑drag policy, and any derivative usage that help control tracking error.

Bottom‑line answer

The news release does **not provide a numerical value for the expected tracking error for DGLO, nor does it describe how that error will be managed.** To find the precise target (e.g., â€œâ‰€â€Ż0.5 % annualized”) and the specific mechanisms (full replication, cash‑drag policy, rebalancing schedule, use of swaps, etc.) you will need to consult the fund’s prospectus (Form N‑2) or the fund’s official website where the detailed methodology and performance metrics are disclosed.

In the absence of those documents, we can only infer that First Trust will manage tracking error using the standard ETF best‑practices described above.

Other Questions About This News

What are the top holdings and sector allocations of the RBA Deglobalization Index? How might this ETF affect the price and trading volume of related holdings in the current portfolio? How does this offering compare with existing de‑globalization or geopolitical ETFs in terms of performance, risk, and fee structure? What are the marketing and distribution plans for DGLO and how will they impact initial liquidity? What are the regulatory approvals required and are there any pending compliance issues? What is the expected AUM and liquidity profile for DGLO at launch? What are the tax implications for investors, especially regarding dividend distributions and capital gains? What is the expense ratio and how does it compare to similar thematic ETFs? What is the anticipated demand from institutional versus retail investors? How will the fund handle foreign currency exposure and potential hedging costs? How does the ETF’s performance correlate with broader market indices and other de‑globalization or anti‑globalization products? How will the ETF’s trading volume and bid‑ask spreads compare to established ETFs in the same space? What are the primary drivers of the RBA Deglobalization Index – e.g., specific countries, industries, or macro‑economic metrics? How is the index constructed and what methodology is used for de‑globalization exposure?