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Understanding Tracking Error

What is Tracking Error?

Tracking Error measures the difference between:

  • The fully implemented target portfolio
    AND

  • The tax-managed transition portfolio

Why Tracking Error Matters

Tracking Error helps advisors evaluate:

  • Tax efficiency

  • Portfolio alignment

  • Transition trade-offs

Interpreting Tracking Error

Lower Tracking Error

Higher Tracking Error

  • Portfolio closely matches target allocation

  • Fewer deviations from intended strategy

  • Greater deviation due to tax constraints

  • More positions remain in transition

Common Use Cases

Tracking Error is especially useful when:

  • Using restrictive tax budgets

  • Comparing multiple transition scenarios

  • Explaining trade-offs to clients

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