Tracking Error

Tracking error

In an indexing strategy, the standard deviation of the difference between the performance of the benchmark and the replicating portfolio.

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Tracking Error

An excessive deviation between an investment or portfolio and some benchmark. It is commonly used with respect to mutual funds, hedges, or other investment vehicles designed to track some index or other benchmark. If the portfolio's performance falls short of the benchmark, especially by a large amount, there is said to be a tracking error; an investor or investment company may wish to re-evaluate how it puts together the portfolio.

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tracking error

The difference in the return earned by a portfolio and the return earned by the benchmark against which the portfolio is constructed. For example, if a bond portfolio earns a return of 5.15% during a period when the portfolio's benchmark (say, for example, the Lehman Brothers Index) produces a return of 5.06%, the tracking error is .09%, or 9 basis points.

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Tracking Error

What Does Tracking Error Mean?

A divergence between the price behavior of a position or portfolio and the price behavior of a benchmark. It often is used in the context of a hedge or mutual fund that did not perform as effectively as intended, creating an unexpected profit or unexpected loss.

Investopedia explains Tracking Error

Tracking errors are reported as a “standard deviation percentage” difference. This measure reports the difference between the return an investor received and the return on the benchmark the investor was trying to match or beat.

Related Terms:
• Benchmark
• Expense Ratio
• Index
• Mutual Fund
• Total Return