Can Tracking Error Be Negative
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all ETF channels ETF.com Events All Events Awards Dinner ETF Live ETF 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 average tracking error Tracking Difference And Tracking Error Understanding Tracking Difference And Tracking Error ETF.com How do you know if an 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
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Finance Trading Q4 Special Report Small Business Back to School Reference Dictionary Term Of The Day Martingale System A money management system of investing http://www.investopedia.com/terms/t/trackingerror.asp in which the dollar values of investments ... Read More » http://www.nytimes.com/2013/04/07/business/mutfund/exchange-traded-funds-tracking-error-is-often-overlooked.html Latest Videos Why Create a Financial Plan? John McAfee on the IoT & Secure Smartphones Guides Stock Basics Economics Basics Options Basics Exam Prep Series 7 Exam CFA Level 1 Series 65 Exam Simulator Stock Simulator Trade with a starting balance of $100,000 and tracking error zero risk! FX Trader Trade the Forex market risk free using our free Forex trading simulator. Advisor Insights Newsletters Site Log In Advisor Insights Log In Tracking Error Loading the player... What is a 'Tracking Error' Tracking error is the divergence between the price behavior of a position or a portfolio and the price can tracking error behavior of a benchmark. This is often in the context of a hedge or mutual fund that did not work as effectively as intended, creating an unexpected profit or loss instead.Tracking error is reported as a standard deviation percentage difference, which reports the difference between the return an investor receives and that of the benchmark he was attempting to imitate. BREAKING DOWN 'Tracking Error' Since portfolio risk is often measured against a benchmark, tracking error is a commonly used metric to gauge how well an investment is performing. Tracking error shows an investment's consistency versus a benchmark over a given period of time. Even portfolios that are perfectly indexed against a benchmark behave differently than the benchmark, even though this difference on a day-to-day, quarter-to-quarter or year-to-year basis may be ever so slight. Tracking error is used to quantify this difference.Calculation of Tracking ErrorTracking error is the standard deviation of the difference between the returns of an investment and its benchmark. Given a sequence of returns for an investment or portfolio and its benchmark, tracking error is calculated as follows:Tracking Error = Standard Deviation of (P - B
a Variable Worth Watching Advertisement Search Subscribe Now Log In 0 Settings Close search Site Search Navigation Search NYTimes.com Clear this text input Go http://nyti.ms/Y34Ucv Loading... See next articles See previous articles Site Navigation Site Mobile Navigation Advertisement Supported by Mutual Funds In Exchange-Traded Funds, a Variable Worth Watching By ANNA BERNASEKAPRIL 6, 2013 Continue reading the main story Share This Page Continue reading the main story EXCHANGE-TRADED funds that track indexes may sound like straightforward investments. Because they tend to have low fees and can be used to build diversified portfolios, as well as for esoteric strategies, E.T.F.’s are wildly popular among individual and institutional investors alike. But even when E.T.F.’s appear simple, there may be more risk than meets the eye.Buying an index fund does not, in fact, guarantee the same return as the index. While variations tend to be small, the difference between a fund’s return and the index’s return, often called tracking error, can sometimes be significant. Each fund uses its own method and terminology when discussing tracking error, but it’s clear that some funds mimic their benchmarks better than others.The average tracking error of all E.T.F.’s listed in the United States last year was 59 basis points, or slightly more than half of a percentage point, according to a study released last month by Morgan Stanley Smith Barney. For those E.T.F.’s with at least one year of trading history, Morgan Stanley compared the difference in total 2012 return between each fund and its underlying index.The numbers varied widely. For instance, the study found that the iShares MSCI Emerging Markets Financials E.T.F. outperformed its index by 5.39 percentage points last year, while the PowerShares MENA Frontier Countries Portfolio underperformed its benchmark by 4.41 percentage points. Continue reading the main story Advertisement Continue reading the main story Such deviations can make it hard to build a portfolio. “Tracking error, whether positive or negative, should be a concern for investors, as it measures the effectiveness of a manager to replicate the performance of an