ETF tracking error conundrum

Tracking error is one of the biggest risks facing ETF investors – but there still seems to be a lack of understanding over what it is and how to measure it. Should regulators take a firmer hand in establishing a standard calculation methodology? David Wigan reports

Everyone agrees tracking error is one of the biggest risks faced by exchange-traded fund (ETF) investors. Most also agree it is largely unavoidable, but should be minimised as much as possible. The main area of disagreement, in fact, turns out to be much, much more fundamental – people can’t seem to agree on what it actually is.

That may seem surprising – after all, ETF providers regularly highlight low tracking error as a key selling point of their products. Regulators are also keen to improve