What is Tracking Error?
Tracking error is how closely a passive (index) KiwiSaver scheme fund's return follows its target benchmark.
Detailed Explanation
Measured as the standard deviation of the difference between fund return and benchmark return, usually over the past 36 months. Lower is better for an index fund — tight tracking is what you are paying for. Tracking error rises with fees, currency hedging cost, sampling (vs full replication), and cash drag.
Example
A passive global growth fund tracking MSCI World might have a tracking error of 0.20% — typical for a well-run index product.
Frequently Asked Questions
Should active funds have low tracking error?
No — active funds aim to deviate from the benchmark deliberately to add value.