Question #14
Reading: Reading 35 Exchange-Traded Funds - Mechanics and Applications
PDF File: Reading 35 Exchange-Traded Funds - Mechanics and Applications.pdf
Page: 5
Status: Incorrect
Correct Answer: B
Your Answer: A
Question
An ETF's tracking difference is most accurately measured as the:
Answer Choices:
A. standard deviation of the difference in daily returns between the ETF and its benchmark
B. difference between the ETF’s return (based on its NAV) and the return on the index tracked
C. annualized standard deviation of the differences between the daily returns of the ETF and its benchmark
Explanation
Tracking difference is the divergence between an ETF's return (based on its NAV) and the
return on the tracked index. This measure provides an indication of the ETF's ability to
follow its underlying benchmark. Tracking error is the annualized standard deviation of
the daily tracking difference.