Daily Tracking Error
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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 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 tracking error volatility 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).For example, assume that there is a large cap mutual fund that is benchmarked to the Standard and Poor's (S&P) 500 index. Next, assume that the mutual fund and the index realized the follow returns over a given five-year period:Mutual Fund: 11%, 3%, 12%, 14% and 8%.S&P 500 index: 12%, 5%, 13%, 9% and 7%.Given this data, the series of differences is then (11% - 12%), (3% - 5%), (12% - 13%), (14% - 9%) and (8% - 7%). These differences equal -1%, -2%, -1%, 5%, and 1%. The standard deviation of this series of differences, the tracking error, is 2.79%.
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ETFs REIT ETFs Bond ETFs Fixed-Income ETFs Schwab ETFs China ETFs Gold ETFs Silver ETFs Commodity ETFs Health tracking error etf care ETFs Smart-beta ETFs Currency Hedged ETFs High-Dividend-Yield ETFs SPDR ETFs Dividend ETFs iShares ETFs Technology ETFs Emerging Markets ETFs MLP ETFs Vanguard ETFs See all ETF channels http://www.investopedia.com/terms/t/trackingerror.asp 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 Tracking Difference And Tracking Error http://www.etf.com/etf-education-center/21030-understanding-tracking-difference-and-tracking-error.html 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 is a related but distinct metric. Tracking error is about vari
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