Etf Tracking Error Calculation
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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) or mutual fund by doing a standard deviation percentage calculation. However, a simpler method is tracking error calculation example 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 for tracking error is the fact that historical analysis shows that, on average, many more index funds underperform, rather than outperform, the underlying index. Variations between index funds can be significant, wit
Personal Finance Trading Q4 Special Report Small Business Back to School Reference Dictionary Term Of The Day Limit Order An order placed with a brokerage to buy or sell a set number
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of shares at a specified ... Read More » Latest Videos The Bully etf alpha Pulpit: PAGES John Mauldin: Inside Track Guides Stock Basics Economics Basics Options Basics Exam Prep Series 7 etf beta Exam CFA Level 1 Series 65 Exam Simulator Stock Simulator Trade with a starting balance of $100,000 and zero risk! FX Trader Trade the Forex market risk free using our free Forex http://www.investopedia.com/ask/answers/052815/how-can-i-calculate-tracking-error-etf-or-indexed-mutual-fund.asp trading simulator. Advisor Insights Newsletters Site Log In Advisor Insights Log In ETF Tracking Errors: Protect Your Returns By Eric Fontinelle Although rarely considered by the average investor, tracking errors can have an unexpected material effect on an investor's returns. It is important to investigate this aspect of any ETF index fund before investing. The goal of an ETF index fund is to http://www.investopedia.com/articles/exchangetradedfunds/09/tracking-error-etf-funds.asp track a specific market index, often referred to as the fund's target index. The difference between the returns of the index fund and the target index is known as a fund's tracking error. Most of the time, the tracking error of an index fund is small, perhaps only a few tenths of one percent. However, a variety of factors can sometimes conspire to open a gap of several percentage points between the index fund and its target index. In order to avoid such an unwelcome surprise, index investors should understand how these gaps may develop. SEE: Investopedia Special Feature: Exchange Traded Funds What Causes Tracking Errors?Running an ETF index fund might seem like a simple job, but it can actually be quite difficult. ETF index fund managers often employ complex strategies in order to track their target index in real time, with fewer costs and greater accuracy than their competitors. Many market indexes are market capitalization weighted. This means that the amount of each security held in the index fluctuates, according to the ratio of its market capitalization against the total market capitalization of all securities in the index. Since market capitalization is market price times shares outstanding, fluctuations in the price of securities causes the composition of these indexes to change c
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