Component Tracking Error
Contents |
Industry Perspective ETF Newsletters ETF Report ETF Strategist Corner ETF Watch Features & News Index Investor Corner Podcasts White papers ETF Channels Alpha-Seeking ETFs Energy ETFs Oil ETFs Biotech tracking error formula ETFs Europe ETFs REIT ETFs Bond ETFs Fixed-Income ETFs Schwab ETFs China ETFs tracking error interpretation Gold ETFs Silver ETFs Commodity ETFs Health care ETFs Smart-beta ETFs Currency Hedged ETFs High-Dividend-Yield ETFs SPDR ETFs Dividend ETFs
Tracking Error Information Ratio
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 University Inside Fixed Income Inside Smart Beta Inside ETFs
Negative Tracking Error
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 ETF is doing its job well? Some might turn to last year’s performance, but tracking error etf 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 performance of the fund and the total return performance of its underlying index. In laymen’s terms, tracking error basically looks at the volatility in the difference of p
CFA Program CFA Forums CFA General Discussion CFA Level I Forum CFA Level II Forum CFA Level III Forum CFA Hook Up CAIA More in CAIA CAIA Test Prep CAIA Events CAIA Links About
Tracking Error Cfa
the CAIA Program FRM More in FRM FRM Test Prep FRM Events FRM Links About annualized tracking error the FRM Program Careers Investments Water Cooler Test Prep Test Prep Sections CFA Test Prep CAIA Test Prep FRM Test Prep Calendar AF tracking difference Deals CFA Test Prep CFA Events CFA Links About the CFA Program Home Forums CFA Forums CFA Level II Forum Tracking error vs Tracking risk Tweet Widget Google Plus One Linkedin Share Button Facebook Like Last post Bradleyz http://www.etf.com/etf-education-center/21030-understanding-tracking-difference-and-tracking-error.html Mar 27th, 2008 3:46pm 412 AF Points If you look up “tracking error” on wikipedia, it says “It measures the standard deviation of the difference between the portfolio and index returns. In the curriculum, “tracking error” is also known as “active return” and is defined as the difference between the return on the portfolio vs the benchmark. There is no standard deviation mentioned in this definition. On the other hand, if you look up “tracking risk” in http://www.analystforum.com/forums/cfa-forums/cfa-level-ii-forum/9675527 wikipedia, it doesn’t give anything, but if you look up “active risk”, which according to CFA is another workd for “tracking risk”, it says it “is defined as the annualized standard deviation of the monthly difference between portfolio return and benchmark return. In the curriculum, “tracking risk” is defined as the standard deviation of the active return. It is broken into 2 parts, active factor risk (such as over or under weighting industries) and active specific risk (such as specific stocks). My question is, wouldn’t portfolio managers consider minimizing specific components of tracking risk and not tracking error? I could understand that a PM may not want to bet too heavily on a few industries so that the benchmark is no longer applicable. I do not understand why they’d want to reduce the tracking error (active return), which is the difference between their returns and the index. After all, isn’t that what they’re getting paid to do? The reason I’m asking is because I’ve come across 2 cases while reading about the portfolio mangers strategies where they’ve said they want to keep “tracking error” below a certain %. Save 15% on 2017 CFA® Study Materials Wiley is Your Partner Until You Pass. Prepare for Success on the Level II Exam and Take a Free Trial. Learn More Share this Facebook Like Google Plus One Linkedin Share Button Twee
and Guidelines Policy Positions and Research Reviews & Summaries CFA Digest Book Reviews Research Foundation Reviews Research tracking error Foundation Briefs Other Topical Collections Career Resources Study Materials & Courses Articles Available in Chinese (刊物/文章) Settings Why have you reached this page? Your browser component tracking error is not currently configured to accept cookies from this website. This means that the site will not run as smoothly/quickly as possible and could result in certain functionality not working as designed. Recommendation: Enable cookies on your browser. Find out more Search publications Search in: All Publications Advanced Search Search Tips Contact Us | Privacy Policy | Terms & Conditions | Subscribe | Reprints and Permissions © 2016 CFA Institute. All Rights Reserved
being tactical managers, we like to be tactical about being tactical; in other words, avoid trading and turnover at all costs because they have sunk, guaranteed costs that we have to trade-off versus potential gains.In the past, we've written about an overlay methodology that utilized principal component analysis (see Being Strategic about Tactical Allocations parts I and II). The goal of the methodology was to utilize the market structure to filter out weight changes that did not represent a substantial departure in the effective bets we were currently making. For example, a 20% allocation change from SPY (U.S. large cap) to MDY (U.S. mid-cap) in a globally-diversified portfolio may not create a large enough change in our beta exposures to justify the cost.So while our cost-ignorant model may dictate certain weights, we may stick to our old weights because the new weights aren't worth the trading cost. Using the PCA-based method, we found that we could reduce portfolio turnover relative to model turnover by 2/3rds; however tracking error was fairly high at nearly ~1.5% annually.While the PCA method implicitly considered many of the same concepts measured by tracking error, it did not reference tracking error explicitly (though, it could be fairly trivially extended to do so). Tracking error, however, may be exactly what we want to explicitly reference in our methodology. After all, what we are really trying to say is: "only make a weight change when it introduces a significant enough tracking error to my old portfolio weights."How do we do this? Consider the following pseudo-code:let w be the model weights let p be the current portfolio weights let C be the covariance matrix of underlying securities let t be our tracking error threshold for each date: z = (w - p) if sqrt(z'Cz) > t: p = wEffectively, w