What is Tracking Error?
Tracking Error A measure of the divergence between the performance of a portfolio and its benchmark, calculated as the standard deviation of the difference in returns over time; key metric in active and passive fund management.
Source: CFA Institute, IFRS Foundation, FASB (GAAP), Basel III Framework
How is “Tracking Error” Used in Practice?
A low tracking error indicates that a fund’s returns are closely aligned with its benchmark, which is critical for passive index funds.
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Who Needs to Know This Term?
- Financial Analysts
- Bankers
- Traders
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What is Tracking Error?
A measure of the divergence between the performance of a portfolio and its benchmark, calculated as the standard deviation of the difference in returns over time; key metric in active and passive fund management.
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