Tracking Error

As tracking error ( short TE, German, mutatis mutandis: tracking error ) refers to the unintentional deviation between an index fund or a portfolio against its benchmark index over a given observation period.

The tracking error can be calculated in two different ways:

• As a relative difference ( a percentage value ) between the benchmark and the portfolio.
• The standard deviation of the differences between the benchmark and the portfolio.

This standard deviation provides only a statistical measure and not a direct comparison. In addition, you do not recognize on the basis of the value if the portfolio has performed better or worse than its benchmark, since the standard deviation is always positive.

A low tracking error represents one of the benchmark very similar performance. The greater the average deviation of the fund's development from the performance of the benchmark, the higher the tracking error.

When considering funds typically the net asset value and not the market value is used for comparison.