The difference between the worth behavior of a footing or a portfolio and therefore the price behavior of a benchmark is understood as a tracking error. this can be frequently discussed in respect to a hedge fund, fund, or exchange-traded fund (ETF) that underperformed expectations and resulted in an unexpected gain or loss.
The difference between the return an investor earns and also the return of the benchmark they were seeking to emulate is thought of as a tracking error, and it’s expressed as a customary deviation percentage difference.
Tracking error may be a frequently used indicator to assess how well an investment is performing because portfolio risk is usually assessed compared to a benchmark. The constancy of an investment over time as compared to a regular is demonstrated by tracking error. Even perfectly indexed portfolios against a benchmark react differently from the benchmark, whether or not this difference may only be marginally different from day to day, quarter to quarter, or year to year. This discrepancy is measured using the tracking error metric.
Tracking error are often accustomed assess portfolio managers from the angle of investors. A manager’s poor average returns and a giant tracking error are red flags indicating something is seriously wrong therewith investment, and therefore the investor should probably hunt for a replacement.