What is meant by tracking error?

Tracking error is formally defined as the standard deviation of the difference between the returns of the portfolio and the returns of the benchmark—or the dispersion of the excess portfolio returns compared with its benchmark. It’s typically expressed both as an annualized number and as a percentage.

What causes tracking error?

Tracking error can be caused by two reasons. First, by the trading cost and second, by improperly replicating the index. For an ETF, tracking error is the deviation in performance of the fund and its index. It occurs primarily because of the ETF’s total expense ratio (a kind of trading cost).

What is considered a high tracking error?

Theoretically, an index fund should have a tracking error of zero relative to its benchmark. Enhanced index funds typically have tracking errors in the 1%-2% range. Most traditional active managers have tracking errors around 4%-7%.

What does ex-post mean in business?

after the fact
Ex-post is another word for actual returns and is Latin for “after the fact.” The use of historical returns has customarily been the most well-known approach to forecast the probability of incurring a loss on investment on any given day. Ex-post is the opposite of ex-ante, which means “before the event.”

How do you calculate tracking error?

Tracking 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)

What is ETF vs index?

The main difference between index funds and ETFs is that index funds can only be traded at the end of the trading day whereas ETFs can be traded throughout the day. ETFs may also have lower minimum investments and be more tax-efficient than most index funds.

How do you find the tracking error?

What does a low tracking error mean?

Low tracking error means a portfolio is closely following its benchmark. High tracking errors indicates the opposite. Thus, tracking error gives investors a sense of how ‘tight’ the portfolio in question is around its benchmark or how volatile the portfolio is relative to its benchmark.

What is a good Sharpe ratio?

Generally speaking, a Sharpe ratio between 1 and 2 is considered good. A ratio between 2 and 3 is very good, and any result higher than 3 is excellent.

What is the difference between ex-ante and ex-post demand?

In Economics, ex ante demand means the amount of any commodity or service that a consumer is willing or expected to consume or purchase and ex post demand indicates the amount of the commodity or service that is actually purchased or consumed by the consumer or buyer.