A Phantom Menace?
Tracking error can be a useful fund performance evaluation and comparison metric, but it can also be a distraction, particularly when misapplied.
In the month of June, the market price of iShares MSCI Emerging Markets (EEM) had a volatility that was 27% greater than its index and an annualized tracking error of 25%. While that might sound alarming, the exchange-traded fund has actually functioned superbly. The concern lies not with the fund, but with how volatility and tracking error are being used. Before we dive into the details of what happened in June to EEM, let's define volatility and tracking error and discuss some ways in which tracking error can be used.
Michael Rawson does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.