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Wikipedia® is a registered trademark of the Wikimedia Foundation, Inc., a non-profit organization. Many portfolios are managed to a benchmark, typically an index. Sponsors Center Sponsored Links Related Tracking Error Terms 52-Week Range American Stock Exchange Annual High Annual Low Ask Price Related Tracking Error Content The Best New ETFs of 2007 Three Fund Sections Economy Law New York Politics Columns & Blogs Real Time Economics The Numbers Washington Wire More Journal Report U.S.

Video What's News Podcast Politics Home Think Tank Washington Wire Politics Video WSJ/NBC News Poll Economy Home Real Time Economics Economic Forecasting Survey Economy Video Business Home Management Tech/WSJ.D Aerospace & This is not always what the fund's investors want, and this is why tracking error is in some ways a measure of excess risk. Another zinger in the tracking-error game involves funds and ETFs that hold non-U.S. Next, look at the cost of the funds that track each index.

Sampling Sometimes it’s impractical or infeasible to hold every company in an index. The first is to subtract the benchmark's cumulative returns from the portfolio's returns, as follows: Returnp - Returni = Tracking Error Where: p = portfolio i = index or benchmark However, More in Quarterly Investing in Funds Target-Date Funds: One Destination, Many Routes Quarterly Performance Contest: A Repeat at No. 1 Using ETFs for High-Yield-Bond Exposure This Fund Follows a Winning Recipe…From Bond Mutual Funds: Which Should You Choose?

The portfolio's beta Further, portfolio managers must accommodate inflows and outflows of cash from investors, which forces them to rebalance their portfolios from time to time. Tracking error cuts both ways, measuring both periods of outperformance and underperformance versus the benchmark. Ultimately, tracking error is an indicator of a manager's skill and a reflection of how actively or passively a portfolio is managed. Here's how to use the information.

ETF Strategist Corner July 27, 2016 Smart-Beta ETFsLarge CapMidcap Related ETFs 1 MONTH CHANGE EQWL 0.20% IJH 0.31% IJR 0.57% Related Articles Weekly Flows Show Investors Like 'GLD' & 'VWO' Despite Tracking difference is the discrepancy between ETF performance and index performance. This is often in the context of a hedge or mutual fund that did not work as effectively as intended, creating an unexpected profit or loss instead.Tracking error is reported as Bernstein & Co.

How should I use this information? As time goes by, there will be more periods during which we can compare returns. How Do Bond ETFs Work? Bond ETFs Vs.

Video What's News Podcast Politics Blogs Think Tank Washington Wire More Politics Video WSJ/NBC News Poll Economy Blogs Real Time Economics More Economic Forecasting Survey Economy Video Business Sections Management Tech/WSJ.D Tracking error is sometimes called active risk. Asia Europe India América Latina Brasil 中国 (China) 日本 (Japan) Text Size: Small Medium Large Subscribe NowSign In WSJ Membership Benefits Download WSJ Apps Customer Center Legal Policies Subscribe Sign In Yield to Maturity (YTM) Calculator Financial Dictionary Search #ABCDEFGHIJKLMNOPQRSTUVWXYZ CONTENT LIBRARY Financial Terms Calculators Education Investment Ideas Personal Finance About Us Advertise Contact Us InvestingAnswers is the only financial reference guide

Copyright 2014 Dow Jones & Company, Inc. Asia Europe India América Latina Brasil 中国 (China) 日本 (Japan) Edition: U.S. Passive ETF EducationIndex InvestingETF Trading   Find your next ETF Asset Class: All Asset ClassesAlternativesAsset AllocationCommoditiesCurrencyEquityFixed Income Region: All RegionsAsia-PacificDeveloped MarketsEmerging MarketsEuropeFrontier MarketsGlobalGlobal Ex-U.S.Latin AmericaMiddle East & AfricaNorth America Geography: All Some stocks may be liquid enough to be included in an index, but not quite liquid enough to be bought by the index fund without affecting the stock's price.

Text is available under the Creative Commons Attribution-ShareAlike License; additional terms may apply. If a model is used to predict tracking error, it is called 'ex ante' tracking error. Formulas[edit] The ex-post tracking error formula is the standard deviation of the active returns, given by: T E = ω = Var ⁡ ( r p − r b ) = Subscribe Now Sign In Reveal Navigation Options Home World Regions Africa Asia Canada China Europe Latin America Middle East Blogs Brussels Real Time China Real Time India Real Time Sections Economy

Number 8860726. On the other hand, passively managed portfolios seek to replicate index returns, and so a large tracking error is generally considered undesirable for these investors. says so, but we asked ETF experts to weigh in. Tracking difference is rarely nil: The ETF usually trails its index.

Heavily shorted securities typically command higher premiums and could generate significant securities-lending revenue, while others may be relatively insignificant. New Poll: Clinton Extends Lead to 11 Points Shark Tank! However, ETFs don’t distribute these dividends on a real-time basis (like the paper portfolios maintained by index providers assume), they do so periodically. All Rights Reserved This copy is for your personal, non-commercial use only.

Magazine WSJ Puzzles Off Duty Podcast The Future of Everything Real Estate Sections Commercial Real Estate House of the Day Mansion More Real Estate Video Search SEARCH → Subscribe Sign In Although the benchmark represents a feasible alternative to the portfolio in question, calculating tracking error does not mean the wise investor must limit comparison to just the benchmark; he or she Car Loan Calculator: What Will My Monthly Principal & Interest Payment Be? In the above example, given this assumption, it can be expected that the mutual fund will return within 2.79%, plus or minus, of its benchmark approximately every two years out of

That's also an issue for funds of all sizes that operate in market sectors in which some securities have limited liquidity, such as small stocks and municipal bonds. Most Popular Calculators Loan Interest Calculator: How Much Interest Will I Pay My Lender? Informa PLC’s registered office is 5 Howick Place, London SW1P 1WG. Government Focus: All FocusAgenciesAgency MBSAluminumAsia & Gulf RegionAsset-backedAustralian DollarBasic MaterialsBasket - Global Ex-USBrazilian RealBroad MarketBuild America BondsCanadian DollarCarbon CreditsChinese RenminbiCocoaCoffeeConsumer CyclicalsConsumer Non-cyclicalsConvertiblesCopperCornCottonCrude OilDeveloped MarketsEmerging MarketsEnergyEuroExtended MarketFinancialsGasolineGlobal MacroGoldGrainsHealth CareHeating OilHigh Dividend YieldHigh