Determinants of the Tracking Error in ETF

With the growing popularity of such a financial instrument as ETF, the number of scientific papers devoted to this topic has also increased. One of the main areas of research is the study of the imperfection of the process of replicating the behavior of the underlying instrument, namely, the problem of the existence of a tracking error and the detection of the factors determining its magnitude. The purpose of this thesis is to identify what factors have a significant impact on the magnitude of the tracking error in ETF, and the nature of their impact on this financial instrument, that will provide an opportunity to make decisions about investing in ETF taking into account a number of new variables. Two methods are used to determine the magnitude of the tracking error in this paper, and the explanatory variables are: 1. the indicators of financial integration; 2. the volatility of the financial market of the country in which the selected ETFs are traded; 3. The volatility of the underlying instrument of the ETF; 4. the time gap between the countries of trading instruments; 5. the difference between the returns of the underlying instruments and the index of the country in which the ETF is traded. Each of the indicators corresponds to a certain hypothesis. Based on the results of the analysis all assumptions were confirmed. Thus, the presence of a significant impact of the abovementioned indicators on the magnitude of the tracking error was revealed, and, what is more interesting, the impact of country characteristics, whose impact can not be leveled, was significant.