By The ETF Professor Tracking error, the amount by which an ETF's returns deviate from its benchmark index, is a fact of life and an often ignored fact at that. In some instances, a high tracking ...

Tracking error, the amount by which an ETF's returns deviate from its benchmark index, is a fact of life and an often ignored fact at that.

ETF providers last year got better at what they do, serving up funds that more closely tracked the performance of their underlying indexes, according to a Morgan Stanley study that found tracking ...

Tracking error can end up being a hidden cost when it comes to exchange traded fund investing. This fact is enough reason to pay attention to the benchmark that a desired ETF is tracking.

Tracking error, the amount by which an ETF's returns deviate from its benchmark index, is a fact of life and an often ignored fact at that.

In concept, tracking error is similar to volatility; instead of referencing absolute returns, though, tracking error is in reference to a benchmark.

Along those lines, classifying tracking errors as "high" and "low" depends on the ETF's returns.

About 68 percent of all ETFs had lower tracking errors in 2010 compared with 2009, even as expense ratios held steady, suggesting fund managers were.

Essentially, extraordinary tracking errors (over 2%) mean that there is most likely some active fund management going on and put bluntly, the fund isn’t achieving its mandate--to track its index.

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 can end up being a hidden cost when it comes to exchange traded fund investing. This fact is enough reason to pay attention to the benchmark that a desired ETF is tracking.