Jälgimisviga

Jälgimisviga, often translated as tracking error, refers to the discrepancy between the actual price movement of an underlying asset and the price movement of a financial instrument designed to track it. This is most commonly observed in index funds or exchange-traded funds (ETFs) that aim to replicate the performance of a specific market index. The goal of such funds is to mirror the returns of their benchmark index as closely as possible.

Several factors can contribute to jälgimisviga. One significant cause is the management fees charged by the fund. These fees are deducted from the fund's assets, leading to a slight underperformance compared to the index. Another factor is the cost of trading securities within the fund. When the index composition changes, the fund must buy or sell underlying assets, incurring transaction costs that impact its overall return.

Operational inefficiencies and sampling methods can also introduce tracking error. For passively managed funds that hold all the securities in an index, the error might be minimal. However, some funds may use a sampling approach, holding only a representative subset of the index's securities to reduce costs. This can lead to deviations from the index's performance. Additionally, dividend reinvestment policies and the timing of cash flows can introduce small discrepancies.

While a certain level of tracking error is inherent in most index-tracking products, a significantly large or erratic tracking error can be a concern for investors seeking precise index replication. Financial institutions strive to minimize tracking error through efficient portfolio management and operational processes.