Category: Tracking Error

Core-Satellite, Tracking Error, and Dashboard upgrades

We have added some new functionality to the Core-Satellite backtest, Tracking Error tool and Dashboard.

 

Core-Satellite

The Core-Satellite backtest has an updated look and the Hold Filter, which we recently added to the Portfolio RS and RS - Combine Portfolios, can now be applied to either (or both) of the satellites.

 

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The appearance of the other parallel relative strength backtests, the sequential RS and various regime backtests has been similarly updated.

 

Tracking Error tool

The tracking error values now link through to the ETF charts page, which will automatically load the two securities over the specified duration and display their performance.

 

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Dashboard

We recently added a new Summary window option that displays the 1-Day, Year-To-Date, 2021 and 2020 Total Return of each security in your chosen list.

 

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How to use Tracking Error to improve consistency in ETF backtesting

Instructional video on how to use Tracking Error to improve consistency in ETF backtesting.  #STUDY

to expand video on screen, click the '4 expanding arrows' icon in the bottom right corner of the video screen. Use the settings icon to change to 1080 quality if it seems at all blurry

Tracking Error

We have added a new tool that enables subscribers to see how closely the ETFs, stocks or mutual funds in their various lists track a given benchmark security.

Tracking error is the annualized standard deviation of the daily return difference between the security and the benchmark. i.e.

TE = StDev(daily total return - benchmark daily total return) x SQRT(252)

1% Tracking Error therefore means that, if returns are normally distributed, the security’s return will be within +/- 1% of the benchmark return 68% of the time and within +/- 2% of the benchmark 95% of the time.

Realized daily returns are obviously not perfectly normally distributed, so those probabilities are not to be taken literally, they are simply a rough guide.  Nonetheless, tracking error provides an alternative perspective on risk from volatility and maximum drawdown.

A stock or ETF that has a persistently high tracking error will deviate substantially from the benchmark and is therefore unpredictable.  This does not mean the security must automatically be excluded from the portfolio, but it would be prudent to set its position size accordingly.

Side note: The tracking error of a 2x leveraged ETF will be approximately the same as the volatility of its benchmark. i.e.

StDev (2x Daily Return - Daily Return) x SQRT(252) =  StDev (Daily Return) x SQRT(252) = Volatility
SSO tracking error vs SPY  ~= SPY volatility
QLD tracking error vs QQQ  ~= QQQ volatility
etc.

 

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Go to the Tracking Error tool