Tracking error
Tracking error is a metric used to measure the deviation of a portfolio’s performance from its benchmark index. It quantifies the volatility of a portfolio’s relative returns to its benchmark.
Key Matters and Considerations in ESG
In simple terms, tracking error tells us how closely a portfolio’s returns align with the returns of its benchmark. A low tracking error indicates that the portfolio closely tracks the benchmark, while a high tracking error suggests a significant deviation from the benchmark.
Tracking error is calculated as the standard deviation of the difference between the portfolio’s returns and the benchmark’s returns over a specific period of time. It is usually expressed as a percentage.
There are several factors that can contribute to tracking error. These include differences in portfolio composition compared to the benchmark, such as holding different securities or having different weightings of securities. Transaction costs, management fees, and timing differences in trading can also impact tracking error.
Investors and fund managers pay attention to tracking error as it provides insights into the portfolio’s performance relative to the benchmark. A low tracking error is often desired for index-tracking or passive investment strategies, where the goal is to closely replicate the benchmark’s performance. On the other hand, active managers who aim to outperform the benchmark may tolerate a higher tracking error in pursuit of higher returns.
It’s important to note that tracking error is just one measure of a portfolio’s performance and should be considered alongside other risk and return metrics. A low tracking error does not necessarily guarantee superior performance, and a higher tracking error does not necessarily imply poor performance. Each investment strategy has its own objectives and risk tolerance, and tracking error is just one factor to consider in evaluating the effectiveness of the strategy.
About GreenCo
GreenCo is a professional ESG advisory firm accredited with ISO 9001 in ESG Reporting and Climate Policy Advisory Services. Established in 2016, we were born to tackle ESG and climate risk management challenges. GreenCo has a professional team consists of talents with multiple backgrounds with
- PhD
- Practitioner Member of the Institute of Environmental Management and Assessment (IEMA)
- CFA (the CFA Institute) and Certificate in ESG Investing
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- Completion of Certified GRI Training Programme
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- Member of Global Association of Risk Professionals
- Master’s degree in envirnomental science
GreenCo has solid track record in ESG advisory for over 60 listed companies in Hong Kong, Mainland China, Singapore and Korea, covering all industries under the Hang Seng Industry Classification System.