Tracking Error and Active ETFs Analysis

This technical report examines the concept of Tracking Error in the context of active Exchange-Traded Funds (ETFs) across different global markets. It outlines the rapid growth of active ETFs, which have reached nearly US $1.8 trillion in net assets by the end of 2025, highlighting a more than 50% annual asset growth in the years 2024 and 2025. The report details how the definition and implementation of active management strategies are evolving, particularly with the rise of systematic approaches that utilize algorithms and mathematical models. It discusses the importance of Tracking Error as a measure of how closely an ETF's returns align with its benchmark index, noting that lower Tracking Error indicates better tracking performance. Additionally, the report segments ETFs into passive and active categories, providing insights into their respective characteristics and performance metrics. It also addresses regional differences in ETF management strategies between the US and Europe, particularly in terms of pricing and active management styles.