Concept · Equity strategies
What is tracking error?
Direct answer The standard deviation of the return difference between a portfolio and its benchmark. A portfolio run at 2% annualized tracking error typically finishes a year within about 2 points of the index roughly two years out of three, and further away the other one.
Tracking error is the leash length on a tilt, not its expected payoff. A tilt can run a small tracking error and still lose money for years, or run a large one and still win; the number only says how far the ride can swing from the index, not which direction it goes.
This site’s equity tilt is sized to roughly 2% tracking error against the cap-weighted index. The value tilt read shows what that leash bought and cost since 1985.
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