# A B C D E F G H I J K L M N O P Q R S T U V W X Y Z
Estimated Holding Cost

Estimated Holding Cost measures the realized performance of an ETF manager relative to the benchmark index after all expenses both disclosed and undisclosed. This calculation measures predictable returns of the portfolio net asset value relative to the underlying index, isolating the information in past performance data predictive of how a fund will perform against its index in the future. The largest component is likely to be the fund's expense ratio and like an expense ratio, the estimated holding cost is expected to be a positive number that represents the extent to which a fund has underperformed its benchmark. A smaller or even negative estimated holding cost shows that a manager is doing a better job finding the lowest cost ways to replicate the benchmark index.

Many other data providers measure tracking error as the average deviation of fund returns from the benchmark index. Morningstar decomposes that traditional measure into two separate data points: estimated holding cost and tracking volatility. Our estimated holding cost captures the predictable drift from the total return version of the index due to both explicit and hidden costs and revenues, such as swap contract spreads, dividend withholding taxes, and securities lending. Our tracking volatility calculation isolates the risky, unpredictable deviations of performance from the index, which are typically caused by sampling or otherwise incomplete replication of the benchmark portfolio.

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