Stock Market Glossary
Tracking error
Standard deviation of the return difference between the fund and the benchmark index.
In brief: Standard deviation of the return difference between the fund and the benchmark index.
Meaning in practice
A low tracking error shows that an ETF accurately tracks its index. For actively managed funds, a high tracking error is necessary in order to stand out from the index – a prerequisite for outperformance, but also for underperformance.
Context for investors and traders
For investors, the term becomes practical in the context of objectives, time horizon, risk capacity and costs. A suitable solution can differ between two people even when they consider the same product or metric.
How to use this in practice
Use the term first to describe the situation and add verifiable data: time frame, benchmark, costs and liquidity. Only then does it become an assessment that can be connected to an investment objective and risk budget.
What to keep in mind
Avoid false precision. Many market terms describe probabilities or historical patterns; they neither guarantee a return nor replace the review of a specific security.
