Importance of Tracking Error in ETFs

How vital is the tracking error in Exchange Traded Funds? - Mahesh Jain

Editor Responds : Thank you for writing to us. Tracking error is a crucial metric used to evaluate the performance of ExchangeTraded Funds (ETFs) and their ability to replicate the performance of their underlying index or benchmark. It measures the consistency and accuracy with which an ETF tracks the index it aims to replicate. The significance of tracking error lies in its ability to provide insights into the ETF's efficiency and potential deviations from its benchmark. By analysing tracking error, you can identify the sources of deviation between the ETF's returns and the benchmark's returns. This analysis can help determine specific sectors or stocks that contribute to the tracking error.