On average, tracking error among the 700 ETFs surveyed in 2011 averaged about 52 basis points at the end of 2011, about 22 basis points lower than the 2010 average.
Tracking error is an important measure of how well an ETF is replicating its benchmark, and this has become more critical as active management within the industry is becoming a more realistic alternative. [5 Things to Consider When Choosing ETFs]
Furthermore, investors may not be aware that expense ratios and management fees are counted as part of tracking error and it can be the most dominant source of this problem. This also explains why some of the larger U.S. equity-linked ETFs, those that track a broad, major index, have some of the lower expense ratios in the business.
Tisha Guerrero contributed to this article.