// definition
Tracking error
Volatility of returns relative to a benchmark
Short definition
The standard deviation, usually annualized, of periodic return differences between a portfolio and its benchmark. Realized tracking error uses returns observed over a specified window; ex-ante tracking error estimates their dispersion with a risk model. The frequency, window, currency and annualization method must be specified. Tracking difference measures the performance gap over a period and is a separate metric.
risk atlas
Knowledge map
Intuition
Measuring the variability of return differences requires comparable observations over time.
Related analyses
Primary sources
- MSCI, Introducing MSCI IndexMetrics, December 2013Appendix, page 27: annualized standard deviation of active returns, using monthly observations here.
- MSCI, Bond-Index Replication While Navigating VolatilityFootnote 1: projected annualized active risk between portfolio and benchmark.
- ESMA, Guidelines on ETFs and other UCITS issues, 2014Definitions and paragraph 11: tracking error, annual tracking difference and anticipated versus realized measures.