Series 7 practice questionmediumPackaged Products — ETFs
An ETF's tracking error refers to:
- AThe difference between the ETF's returns and its benchmark index✓ Correct answer
- BErrors in the calculation of the ETF's NAV
- CThe spread between the bid and ask price
- DMistakes in the ETF's prospectus
Explanation
Why A — The difference between the ETF's returns and its benchmark index
Tracking error measures the divergence between an ETF's performance and its underlying benchmark index. Causes of tracking error include management fees, transaction costs, sampling methods (when the ETF holds a subset of the index), and cash drag from dividend payments. Lower tracking error indicates the ETF more closely mirrors its benchmark.
Turn it into reps
Reading one answer is not the same as being ready
Lucky the Banker is a free practice app with 755+ Series 7 questions, weak-area tracking, and timed mock exams. No credit card, no paywall.
Related Investment Information & Recommendations questions