Tracking Error
The standard deviation of the difference between portfolio returns and benchmark returns.
What it means
Tracking error measures how much a portfolio's returns deviate from its benchmark returns. It's the standard deviation of the difference between portfolio and benchmark returns. Low tracking error means the portfolio closely follows the benchmark.
The math
Calculate the difference between portfolio and benchmark returns for each period, then find the standard deviation of those differences.
How to read it
- < 1%Very tight - passive index tracking
- 1% - 3%Low - closet indexing or slight active tilt
- 3% - 7%Moderate - active management with benchmark awareness
- > 7%High - truly active, benchmark-agnostic management
Worked example
An S&P 500 index fund typically has tracking error under 0.1%. An active large-cap fund might have 3-5% tracking error. A concentrated stock picker might have 10%+ tracking error.
In context
Tracking error helps you understand if your active manager is truly active or just charging high fees for near-index performance. It also indicates how different your portfolio experience will be from the benchmark.
Keep exploring
Benchmark
A standard (like S&P 500) used to measure portfolio performance. Enables apples-to-apples comparison.
Alpha
The excess return of a portfolio compared to what would be expected given its beta. Positive alpha means outperformance.
Standard Deviation
A measure of how spread out returns are from the average. Higher means more volatile.
Correlation
Measures how two assets move together. Ranges from -1 (opposite) to +1 (identical). Key for diversification.
Capital Asset Pricing Model (CAPM)
A model relating expected return to systematic risk (beta). Foundation for understanding alpha and beta.
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See Tracking Error in action
Portfolio Genius calculates tracking error and other key metrics automatically for your portfolio. Get AI-powered insights in seconds.