What is tracking error?
Tracking error measures how tightly a portfolio hugs its benchmark. Take the portfolio's return minus the benchmark's in each period — the active return series — and measure how much that series varies, annualized. A near-index fund has low tracking error; a portfolio taking large active bets has high tracking error. It is never negative.
How it works
The number people usually mean is the realized, or ex-post, one: it is computed from returns that already happened, so it describes a window of history and forecasts nothing. Two portfolios with the same average active return can have very different tracking error, and that difference is the whole point — one got there steadily, the other by swinging.
The forward-looking, or ex-ante, one is a different calculation from different inputs. Rather than reading past active returns, it starts from today's active positions — how far each weight sits above or below the benchmark's — and an estimate of how the holdings move together, then asks how much dispersion those bets imply going forward. It can be computed on a book with no history at all, which is exactly when a manager wants it.
The two answer different questions and will not agree. Realized tracking error says what the bets you used to hold actually did; ex-ante says what the bets you hold now imply. A book that just changed hands has a low realized figure and can carry a large ex-ante one, and neither number is wrong.
Both are annualized from whatever frequency the underlying returns carry, and both inherit the benchmark you chose. Change the benchmark and the tracking error changes, because the quantity was never about the portfolio alone.
Where you see this in the terminal
PORT · Risk tab(account required)realized tracking error beside the ex-ante active-risk panel, on the same book
Tracking error conventionsthe alignment rule, the annualization, and the stated limits
Active-risk decompositionthe forward-looking half — where the implied active risk is coming from
The conventions behind it
What this page explains in plain language, the methodology documents state as conventions: the inputs, what is rejected, and the stated limits.
More of these: every concept page. The full transparency index is at Methodology.