I tried comparing Vanguard's ETF returns to the index the ETF is tracking and it looks like their ETF highly outperformed the index?
The S&P/ASX 300 index only grew less than 29% total in 5 years, roughly 5.5% annualized growth.
Vanguard's ETF (scroll down to Australian Shares, VAS, S&P/ASX 300) claims 8.85% annualized returns, which is 54% total growth over 5 years.
Why is there such a big difference?
Repost of comment as an answer (as per Chirlu's suggestion).
The index does not take into account the dividends paid by the stocks in the index; the ETF does. So the ETF's return outperforms the return of the index.
An ETF can be detached from the value of the underlying index. The index is obviously formulated based on the stocks that make up the index. So the value of those stocks can grow at a rate that differs from the growth in the demand for the ETF. The ETF in it of itself functions like a stock, selling based on supply and demand. So although it may track an index (rise when the index rises, fall when the index falls since it is made up of some of the underlying securities in the index) the actual demand for that ETF may differ from the stocks that make up the index. This can cause a divergence in price, although they will almost always go in the same direction. This means an ETF can in theory fall by more than the index falls, or rise by more than the market rises.
