NAV and Tracking Error

What is NAV and what is tracking error?

Answer

  • NAV (Net Asset Value):

    \[ \text{NAV} = \frac{\text{Total Market Value of Assets} - \text{Liabilities}}{\text{Number of Shares Outstanding}}. \]

    Note that "Liabilities" here is related to the ETF entity and not the basket of underlyings (things which drive the revenue of the ETF sponsor etc.).

  • Tracking Error: A measure of how closely the ETF follows its benchmark index. It is defined as the annualized standard deviation of the difference between the ETF’s returns and the index returns.

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