Tracking Error Definition

Learn the definition of tracking error and other ETF terminology from the etf.com glossary.

ETF
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Reviewed by: etf.com Staff
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Edited by: etf.com Staff

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.

Related Terms

Exchange-Traded Fund, Benchmark

ETF Glossary is etf.com’s collection of key terms and definitions related to exchange-traded funds. ETFs are investment funds that are traded on stock exchanges, and they can encompass a wide range of asset classes, including stocks, bonds, commodities and more. Given the diverse range of ETFs and the complexity of financial markets, having a clear understanding of ETF-related terminology is instrumental for investors looking to make informed decisions, manage risks effectively and navigate the evolving landscape of ETF investments.