Calculating Tracking Error Etf
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Calculating Tracking Error In Excel
Trade the Forex market risk free using our free Forex trading simulator. Advisor Insights Newsletters Site Log In Advisor Insights Log In How can I calculate the tracking error of an ETF or indexed mutual fund? By J.B. Maverick | May 28, 2015 -- 12:11 PM EDT A: Calculate the tracking error of an indexed exchange-trade fund (ETF) calculating tracking error of portfolio or mutual fund by doing a standard deviation percentage calculation. However, a simpler method is to just subtract the index or benchmark return from the portfolio return. For example, if an index or benchmark gains 2% over the course of a year, but an index mutual fund that tracks the index gains 3% over the same time period, then the tracking error for that mutual fund is 1%. Tracking error can be an important factor in portfolio management, although investors often overlook this measure. All index funds do not perform exactly the same, nor do they all perfectly match up with the index or benchmark they are designed to track. Tracking error is simply the amount by which a fund's return, as indicated by its net asset value (NAV), varies from the actual index return. Analysts recommend considering tracking error as one factor when making the decision of choosing one index fund over another. The term "tracking error" can be misleading. Tracking error is not necessarily a negative, since the deviation from the index can be positive for investors if their chosen fund outperforms the index. However, one of the main reasons for investors to watch
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ETFs High-Dividend-Yield ETFs SPDR ETFs Dividend ETFs iShares ETFs Technology ETFs Emerging Markets ETFs MLP ETFs Vanguard ETFs See all ETF channels ETF.com Events All Events Awards Dinner ETF Live ETF http://www.investopedia.com/ask/answers/052815/how-can-i-calculate-tracking-error-etf-or-indexed-mutual-fund.asp University Inside Fixed Income Inside Smart Beta Inside ETFs Inside ETFs Europe Webinars ETF University ETF Guides ETF University Menu About About Us Careers Advertise Reprints Subscribe Contact Us Legal Info Terms of Service SEARCH Login/Register Home / Guide to ETFs / Understanding Tracking Difference And Tracking Error Understanding Tracking Difference And Tracking Error ETF.com How do you know if an http://www.etf.com/etf-education-center/21030-understanding-tracking-difference-and-tracking-error.html ETF is doing its job well? Some might turn to last year’s performance, but performance isn’t the answer—markets go up and down regardless of how well an ETF does its job. The simplest answer is “tracking difference.” Tracking difference is investors’ metric for assessing whether they’re getting what they pay for. As such, it’s one of the most important ETF statistics to consider. What Is Tracking Difference? The vast majority of ETFs aim to track an index—which means that ETFs try to deliver the same returns as a particular index. Tracking difference is the discrepancy between ETF performance and index performance. Tracking difference is rarely nil: The ETF usually trails its index. That’s because a number of factors prevent the ETF from perfectly mimicking its index. ETF returns don’t always trail their index though; tracking difference can be small or large, positive or negative. Tracking error is a related but distinct metric. Tracking error is about variability rather than performance. Math geeks measure variability through standard deviation. Tracking error is the annualized standard deviation of daily return differences between the total return performan
it indicates how closely a portfolio follows the index to which it is benchmarked. The best measure is the standard deviation of the difference between the portfolio and index returns. Many portfolios are managed to a benchmark, https://en.wikipedia.org/wiki/Tracking_error typically an index. Some portfolios are expected to replicate, before trading and other costs, the returns of an index exactly (e.g., an index fund), while others are expected to 'actively manage' the portfolio by deviating slightly from the index in order to generate active returns. Tracking error is a measure of the deviation from the benchmark; the aforementioned index fund would have a tracking error close to zero, while an actively managed portfolio would normally tracking error have a higher tracking error. Thus the tracking error does not include any risk (return) that is merely a function of the market's movement. In addition to risk (return) from specific stock selection or industry and factor "bets," it can also include risk (return) from market timing decisions. Dividing portfolio active return by portfolio tracking error gives the information ratio, which is a risk adjusted performance measure. Contents 1 Definition 1.1 Formulas 1.2 Interpretation 2 Examples calculating tracking error 3 References 4 External links Definition[edit] If tracking error is measured historically, it is called 'realized' or 'ex post' tracking error. If a model is used to predict tracking error, it is called 'ex ante' tracking error. Ex-post tracking error is more useful for reporting performance, whereas ex-ante tracking error is generally used by portfolio managers to control risk. Various types of ex-ante tracking error models exist, from simple equity models which use beta as a primary determinant to more complicated multi-factor fixed income models. In a factor model of a portfolio, the non-systematic risk (i.e., the standard deviation of the residuals) is called "tracking error" in the investment field. The latter way to compute the tracking error complements the formulas below but results can vary (sometimes by a factor of 2). Formulas[edit] The ex-post tracking error formula is the standard deviation of the active returns, given by: T E = ω = Var ( r p − r b ) = E [ ( r p − r b ) 2 ] − ( E [ r p − r b ] ) 2 {\displaystyle TE=\omega ={\sqrt {\operatorname {Var} (r_{p}-r_{b})}}={\sqrt {{E}[(r_{p}-r_{b})^{2}]-({E}[r_{p}-r_{b}])^{2}}}} where rp−rb is the active return, i.e., the difference between the portfolio return and the benchmark return. Interpretation[edit] An active risk of x per cent would mean that approximately 2/3 of the
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