Index fund is an investment tool, and its tracking error is one of the important indicators to measure the performance of the fund. The smaller the tracking error, the closer the performance of the fund is to the tracked index, which is very important for investors. The following will explain why the tracking error of index funds is as small as possible from three aspects.
1. The smaller the tracking error, the lower the risk.
The smaller the tracking error, the closer the performance of the fund is to the tracked index, which means the lower the risk of the fund. Index funds are based on tracking indexes. If the tracking error is too large, the performance of the fund may be quite different from the index, which will bring higher risks. The smaller the tracking error, the closer the performance of the fund is to the index, and the lower the risk of investors.
2. The smaller the tracking error, the higher the income.
The goal of an index fund is to track the performance of the selected index. If the tracking error is too large, the performance of the fund may be quite different from the index, resulting in the return of the fund deviating from the index. The smaller the tracking error, the closer the performance of the fund is to the index, and the higher the return of investors.
3. The smaller the tracking error, the lower the cost.
One advantage of index funds is low cost, because fund managers don't need complicated stock selection and trading. The increase of tracking error will lead to the increase of fund managers' transactions, thus increasing the cost of funds. The smaller the tracking error, the closer the performance of the fund is to the index, the fewer the transactions of the fund manager, and the lower the cost of the fund.
The smaller the tracking error of index funds, the better, because the smaller the tracking error, the lower the risk, the higher the income and the lower the cost of the fund. For investors, choosing an index fund with small tracking error can help them get a better return on investment. Investors should also be careful not to focus only on tracking errors and ignore other factors, such as fund management fees and stock liquidity.