---
title: "Tracking error"
description: "Tracking error is the volatility of the return differences between a strategy and its parent Combined — how far a member strategy strays from the whole."
canonical_url: "https://fincanva.com/glossary/tracking-error"
last_updated: "2026-10-07"
md_url: "https://fincanva.com/glossary/tracking-error.md"
---

# Tracking error

Tracking error is the [volatility](/glossary/volatility) of the return differences between a [strategy](/glossary/strategy) and the [Combined](/glossary/combined) it belongs to — the standard deviation, period over period, of how far the strategy's return strays from its parent Combined's return.

**Also seen as:** active risk, tracking risk

It measures a strategy against its **parent Combined**, not against a [benchmark](/glossary/benchmark): the common assumption that tracking error is always measured versus a benchmark does not apply here.

## How is tracking error calculated?

Tracking error is the standard deviation of the difference between the strategy's return and its parent Combined's return in each period. A strategy that moves almost in step with the whole produces small, steady differences; one that often diverges produces wide, variable differences. The daily return differences are annualised by multiplying by √252 (252 trading days a year), the same convention Fincanva uses for volatility and the [Sharpe ratio](/glossary/sharpe-ratio).

$$
\begin{aligned}
{\text{Tracking error}} &= \operatorname{stddev}({r_{\text{strategy}} - r_{\text{parent}}}) \\
&\quad \times {\sqrt{252}}
\end{aligned}
$$

where:

- the annualised volatility of the return gap
- the per-period gap between the strategy's return and the return of the Combined it sits inside
- the annualisation of the daily differences

## How does Fincanva handle it?

- Reported on the [Strategy analytics](/glossary/strategy-analytics) page only, in its **Each sub-strategy, against the Combined** card: one bar per strategy in the **Tracking error** column. A strategy analysed on its own still appears there, but it has no parent Combined to be measured against, so its tracking error carries no meaning — read it only for a strategy inside a Combined.
- Measured between a [member strategy](/glossary/sub-strategy) and its parent Combined — the strategy's return relative to the whole, **not** relative to a benchmark.
- Reported as the standard deviation of the daily return differences, annualised by ×√252 — the same convention as volatility and the Sharpe ratio.
- Pairs with the [information ratio](/glossary/information-ratio), which divides a strategy's excess return over the Combined by this tracking error.

## What counts as a high tracking error?

A low tracking error means the strategy moves closely in line with its parent Combined; a high tracking error means it diverges from the whole. Neither is inherently good or bad — the value tells you how much a given strategy pulls the Combined away from its own average path.

## What does it look like in practice?

A Combined holds three strategies. Two of them tend to move closely with the Combined as a whole; the third often zigs when the Combined zags. Day to day, the third strategy's return differs from the Combined's by a wide, shifting margin, while the first two barely differ at all. The standard deviation of those daily differences, annualised by multiplying by √252 — much larger for the third strategy — is its tracking error. A high tracking error flags the strategy that pulls the Combined around the most, independent of whether that strategy made or lost money.

*A tracking error is not a limit on how far a strategy can diverge in future.*

Fincanva is for education and illustration only. It is not personalised financial advice, and past or simulated results do not predict future ones. [Read the Terms Addendum](https://fincanva.com/terms/addendum#section-3)