Tracking Error- Assessing Index Fund Performance

Abstract

As the dollars being indexed grows close to $1 trillion and management becomes more sophisticated, institutional investors are demanding tighter tracking to the index especially with S&P 500 Index Funds.

In our report from the Kentucky State Auditors Office we concluded that a thirty basis point tracking error in a $3 billion S&P 500 index fund; the net result of which is an estimated $7.89 million a year was not acceptable. We also recommended that funds should seek external management of its S&P 500 index fund if internal management cannot reduce tracking errors below that achievable by a compensated external manager.

Note: This is a description of the paper and not the actual abstract.

JEL Classification: G14