Tracking Error Explained

Continuing our "Better with my Finance-Sis" Mini-Series, in part 2 we talk all about Funds! But not just the different types of investment funds, also the difference between Passive and Active Funds.

Passive Funds vs Active Funds

What is a passive fund?

Passive funds usually have lower expense ratios, with a more simplified investment strategy and less involvement of fund managers (or they can also be managed by computers). 

They do still follow a benchmark and aim to deliver returns with that benchmark, and are still subject to 2 important items we need to cover called: expense ratio and tracking error. 

• Tracking Error Defined:  Tracking error is a measure of how closely a portfolio follows the index to which it is benchmarked.

• Expense Ratio Defined: The expense ratio is how much of a fund's assets are used towards administrative and other operating expenses. Because an expense ratio reduces a fund's assets, it reduces the returns investors receive.

What is an active fund?

Active funds typically feature higher expense ratios, attributed to the fund manager's in-depth research, analysis, and management efforts.

Funds We Discuss:

• Money Market Funds
• Mutual Funds
• Target Date Funds
• ETFs - Exchange Traded Funds
• Fixed Income Funds

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