Exchange traded funds are doing a better job of sticking close to their indexes. Tracking error has been on the decline, according to a recent report.
“As a result of lower tracking error in 2011, 53% of ETFs exhibited tracking error less than or equal to their expense ratios,”Morgan Stanley said. “This is a constructive development for ETFs.” [ETFs and Tracking Error]
Tracking error within the U.S. ETF market has improved 30% over the past year. Morgan Stanley found that only one in 11 ETFs has tracking error of more than 1%, reports Cinthia Murphy for Index Universe.
Tracking error is the divergence between price behavior of a position in a portfolio and the actual price behavior within the benchmark. An ETF that did not perform as expected by the provider ends up creating an unexpected profit or loss, explains Investopedia. [Does it Matter Who Manages My ETF?]