Page 192 - A Canuck's Guide to Financial Literacy 2020

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A higher tracking error would mean that the portfolio manager took on great and possible
unnecessary risk. In active ETFs, tracking error would indicate a manager’s level of skill and
a reflection of how well they performed above the benchmark. The higher the return above
the benchmark, the greater the level of skill of the portfolio manager.

Factors that can affect the tracking error include:

1. The number of common securities the portfolio and the benchmark have.
2. Differences in timing, investment style, market capitalization.
3. The equal weighting of securities relative to the benchmark.
4. Management and portfolio fees.
5. Volatility of the benchmark.
6. Portfolio’s Beta.

ETFs vs. Mutual Funds