Tracking Error (TE) quantifies how closely an ETF follows its underlying benchmark index over time. A low Tracking Error indicates disciplined index replication by the fund manager.
Tracking Error Formula
Tracking Error (Annualized) = StdDev(R_ETF,t − R_Index,t) × √252
Primary Causes of Tracking Error in Vietnam ETFs
- Total Expense Ratio (TER): Management and custody fees create a predictable annual drag of 0.55%–0.85%.
- Quarterly Index Rebalancing Friction: Market impact costs when buying additions and selling deletions during HOSE quarterly reviews.
- Cash Drag from Dividend Timing: Ex-dividend dates and cash settlement lags before dividends are reinvested into the basket.