tracking error

The difference between the performance (return) of an individual portfolio and its benchmark. Tracking error is often discussed in the context of a mutual fund or exchange-traded fund (ETF) that did not work as effectively as intended, creating an unexpected profit or loss. Tracking error is reported as a standard deviation percentage difference, which conveys the difference between the return an investor receives and that of the benchmark they were attempting to imitate. When a portfolio is actively managed, tracking error may reflect the investment choices made by the active manager in an attempt to improve performance. If the active manager is successful, tracking error is positive and the portfolio outperforms the benchmark; if not, the portfolio underperforms its benchmark.