Tracking Error Definition
Learn the definition of tracking error and other ETF terminology from the etf.com glossary.
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Learn more about Tracking Error
Tracking Error is a vital metric for evaluating the performance of an ETF relative to its benchmark index. It measures the standard deviation of the difference between the ETF's returns and the returns of the index it seeks to replicate. A low tracking error indicates effective replication, meaning the ETF closely follows its benchmark. Conversely, a higher tracking error suggests disparities between the ETF's performance and the index. Investors closely monitor tracking error to assess the accuracy of the ETF's replication strategy, aiming to choose funds that consistently mirror the intended index, thereby achieving investment goals with precision.
