IShares municipal bond fund tracking error

Tracking error is the ultimate measure of judging an index fund manager's performance. Since bond indexes can include huge numbers of illiquid bonds, replicating an index is often very costly. iShares&reg;, in an attempt to control costs, samples securities in their bond index funds. The sampling attempts to match the sector and risk metrics of the underlying bonds in the index. Because a sampled index fund does not hold all of the securities in the underlying index, its returns may vary somewhat from those of the index. Such performance variance is termed "sampling error." iShares&reg; funds include two broad nationally based exchange traded (ETF) municipal bond funds  structured across two bond maturity levels: short and long term bonds. In addition to these two portfolios, iShares&reg; manages state specific municipal ETFs and fixed target date municipal ETFs. The municipal bond market is a very large market, with many illiquid securities. The following table shows the number of securities held by the funds and by municipal bond benchmark indices. The comparative indices include the S&P Short Term National AMT-Free Municipal Bond Index and the S&P National AMT-Free Municipal Bond Index.

Tracking error
See also: Vanguard municipal funds vs. iShares® municipal etfs 

The following table provides the tracking errors for the iShares&reg; ETFs. Tracking errors reflect both the net asset value and market price returns. The values do not include any purchase or sale transaction costs borne by the investor. In the short performance history of the funds, net asset value return tracking error has been slightly higher than the 0.25% average expense ratio; market price tracking error has been considerably higher. Detailed annual tracking error data, along with additional statistical measurement of fund returns, are provided in the footnote tables.