1. Liquidity: When the fund constructs its portfolio and adjusts its constituent stocks and their weights, it will have an impact on the stock price, resulting in the portfolio deviating from the index. The better the liquidity of constituent stocks, the smaller the influence of index funds on stock prices and the smaller the tracking error. Conversely, the greater the tracking error.
2. Transaction costs: index funds need to pay transaction commissions, stamp duty, transfer fees, etc. When building a portfolio based on index stocks. The existence of transaction costs makes a certain gap between the portfolio of index funds and the constituent stocks of theoretical target index, which leads to the inevitable tracking error.
3. Fund subscription and redemption: In particular, large subscription and redemption will have a greater impact on the investment portfolio, increase the transaction cost and market impact cost of the fund, and expand the tracking error with the underlying index.
4. Dividend reinvestment: Dividend investment will also affect the tracking error of index funds, which is mainly reflected in the fact that listed companies need to pay transaction costs when investing in dividends.
The meaning of tracking error:
Tracking error refers to the difference between the fund's rate of return and the tracked benchmark rate of return. It reflects the risk and uncertainty of fund tracking benchmark. The smaller the tracking error, the closer the performance of the fund is to the tracking benchmark, and the stronger the risk control ability of the fund manager.
The tracking error is mainly caused by the different tracking methods and abilities of fund managers. Some fund managers may take active management, adjust the weight and structure of the portfolio, and be as close as possible to the tracking benchmark, thus reducing the tracking error. Other fund managers may adopt passive management and directly copy the composition and structure of the tracking benchmark, thus reducing the tracking error.
Tracking error has an important impact on the income and risk control of fund investors. If the tracking error is too large, investors may fail to achieve the expected investment goals, or even lose money. Therefore, when choosing a fund, investors should pay attention to the tracking error of the fund and choose a fund with smaller tracking error to protect their investment income and risk control.
It is also important for fund managers to control tracking errors. If the tracking error is too large, it will not only affect the investment income and risk control ability of the fund, but also affect the confidence and trust of investors. Therefore, fund managers should take effective management measures and technical means to minimize tracking errors and improve the fund's rate of return and risk control ability.