Tracking Error Calculator
Tracking error tells you how tightly a portfolio follows its benchmark. It is the standard deviation of the active return, the period-by-period gap between what the portfolio earned and what the index earned. Index funds prize a low tracking error because their job is to mirror the market, while active managers accept higher tracking error in pursuit of outperformance. This calculator takes paired portfolio and benchmark returns for each period, computes the active return series, and returns the periodic tracking error, the average active return, and an annualized tracking error using your chosen periods-per-year factor.
Tracking error formula
Active return_i = portfolio_i - benchmark_i
Mean active = average of active returns
Tracking error = sqrt( sum (active_i - mean active)^2 / (n - 1) )
Annualized TE = tracking error * sqrt(periods per year)
The sample standard deviation (divide by n minus 1) of the active return series is the tracking error. Multiply by the square root of the periods per year to annualize.
How to read tracking error
- Lower tracking error means the portfolio follows its benchmark more closely.
- Index funds typically target very low annualized tracking error, often under 1%.
- Active funds run higher tracking error by design, reflecting deliberate bets.
- Pair tracking error with mean active return to judge whether active risk was rewarded.
- You need at least two periods to compute a sample standard deviation.
Tracking error: frequently asked questions
What is tracking error?
Tracking error is the standard deviation of the difference between a portfolio's returns and its benchmark's returns over time. It measures how closely a fund follows its index: a low tracking error means the portfolio hugs the benchmark, while a high tracking error signals larger active deviations.
How is tracking error calculated?
For each period, compute the active return (portfolio return minus benchmark return). Tracking error is the standard deviation of that series of active returns. To annualize a periodic figure, multiply by the square root of the number of periods per year, for example the square root of 12 for monthly data.
Should I use sample or population standard deviation?
Most practitioners use the sample standard deviation, which divides by n minus 1, because the returns are a sample of possible outcomes. This calculator uses the sample method. With many observations the difference between sample and population is small.
What is a typical tracking error?
Index funds aim for very low tracking error, often well under 1% annualized. Actively managed funds intentionally run higher tracking error, sometimes 4 to 10% or more, reflecting larger bets away from the benchmark. The right level depends on the strategy's mandate.
How do I annualize tracking error?
Multiply the periodic tracking error by the square root of the number of periods per year. For monthly returns, multiply by the square root of 12; for daily returns, by the square root of about 252 trading days. This calculator includes an annualization factor input.
Official sources
- U.S. Securities and Exchange Commission, Investor.gov: Investing glossary.
- National Institute of Standards and Technology: NIST/SEMATECH e-Handbook of Statistical Methods.
Reviewed by the CalculatorHub team, edited by James Graham, 17 June 2026. See our methodology.