# Your question: How do you calculate ETF tracking error?

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## How do you calculate annual tracking error?

Tracking error is calculated by taking the square root of the average of the squared deviations between the investment’s returns and the benchmark’s returns, then multiplying the result by the square root of the scale of the returns.

## How do you calculate tracking error in index funds?

Mathematically, tracking error is the annualized standard deviation of the tracking difference of an Index Fund. In the above case, the tracking error of the Index Fund is equal to the standard deviation of the tracking difference over the 5 year period which is 2.5%.

## Is tracking error a percentage?

Tracking error is formally defined as the standard deviation of the difference between the returns of the portfolio and the returns of the benchmark—or the dispersion of the excess portfolio returns compared with its benchmark. It’s typically expressed both as an annualized number and as a percentage.

## What is a good tracking error number?

Theoretically, an index fund should have a tracking error of zero relative to its benchmark. Enhanced index funds typically have tracking errors in the 1%-2% range. Most traditional active managers have tracking errors around 4%-7%.

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## What is predicted tracking error?

The tracking error predictions of risk models are swayed by recent market conditions. These predictions change significantly depending on the time period of measurement and do not properly capture the absolute level of a portfolio’s active risk.

## How do I calculate my ETF?

Calculating net asset value

The NAV of the ETF is calculated by taking the sum of the assets in the fund, including any securities and cash, subtracting out any liabilities, and dividing that figure by the number of shares outstanding. These data points, including what the fund is holding, are provided daily.

## How do you calculate tracking error from monthly return?

Tracking error is calculated by taking the square root of the average of the squared deviations between the investment’s returns and the benchmark’s returns, then multiplying the result by the square root of the scale of the returns.

## How do I track an ETF?

How to monitor ETF performance

1. Compare it to other ETFs. …
2. Compare it to its benchmark. …
3. Add up the fees. …
4. Disclosure documents. …
5. Review account statements. …
7. Follow stock market news. …
8. General economic news.

## How does an ETF track an index?

With a physical ETF, the ETF provider attempts to track an index by buying the underlying assets of the index with the same weight as in the index, in order to mirror its rise and fall (full replication). If the ETF provider only invests in a selection of the assets, this is called sampling.

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## What is ETF tracking difference?

Tracking difference is the discrepancy between ETF performance and index performance. Tracking difference is rarely nil: The ETF usually trails its index. That’s because a number of factors prevent the ETF from perfectly mimicking its index.

## Is tracking error the same as Alpha?

Alpha is the average active return over a time period. Since backward-looking tracking error measures the standard deviation of a portfolio’s active return, it is different from alpha. A portfolio does not have backward-looking tracking error simply because of outperformance or underperformance.