BacktestFolio · Glossary
Tracking Error
In plain language
If your portfolio gains +12% when the benchmark gains +10%, and next year +8% when the benchmark does +11%, Tracking Error captures how systematically you diverge from it. Low = closely tracking; high = moving independently (for better or worse).
Technical definition
Annualised standard deviation of the difference between portfolio and benchmark returns. Measures replication fidelity: a passive ETF has very low Tracking Error; an active strategy typically has a high one.