Final answer:
The return on an ETF can differ from the return on its underlying reference asset due to factors such as management fees, tracking errors, and liquidity differences, all of which may cause discrepancies in performance.
Step-by-step explanation:
The difference between the return on the underlying reference asset and the return on the exchange-traded fund (ETF) lies in the structure and management of the ETFs themselves. A reference asset, such as an individual stock or a stock index, reflects the performance of the asset or index directly through price movements and dividends. An ETF, on the other hand, tracks the performance of its reference asset but can differ in return due to factors like management fees, the fund's ability to replicate the index, and potential tracking errors. Thus, while the ETF aims to mirror the returns of the underlying assets, discrepancies can occur, leading to slight differences in return. This can be due to several factors, including fund expenses and the ETF's liquidity, which may differ from that of the underlying assets. For example, if an ETF is designed to track the S&P 500 index, the goal is to provide investors with a return that closely approximates the index's performance. However, the ETF might slightly underperform the index due to expenses and other factors while providing benefits such as improved liquidity and diversification.