Crypto ETF tracking error: what it is and why it happens
Tracking error measures how steadily a crypto ETF follows its coin. Cash holdings, trading costs, and share creation can widen the gap over time.
Vahe HakobyanEditor-in-chief
Updated Oct 6, 20263 min readFact-checked
On this page
- Cash holdings and trading costs pull returns from the coin.
- Crypto trades all day, but net asset value is set at US close.
- Tracking error is volatility; tracking difference is the total gap.
- Futures-based crypto ETFs can have much larger tracking error.
- Check the fund page or annual report over several months.
Tracking error measures how closely a crypto ETF's returns follow its underlying coin. It is the volatility of the gap between the fund's returns and the coin's returns, not the size of the gap.
What causes crypto ETF tracking error?
A spot crypto ETF rarely holds the exact amount of the coin. Cash holdings, trading costs, and rebalancing delays pull its returns away from the coin's returns. Crypto trades around the clock, but the fund's net asset value is set once at the US market close. Under the SEC rules for the first US spot bitcoin ETFs, approved in January 2024, authorized participants create and redeem shares in cash, so the fund buys and sells the coin itself.
- Cash holdings: money set aside for fees does not move with the coin.
- Trading costs: buying and selling the coin reduces returns.
- Rebalancing delays: the fund takes time to adjust after money moves.
- Cash creation and redemption: the fund buys and sells the coin itself.
Tracking error vs tracking difference?
Tracking error is the volatility of the gap between a fund's returns and its benchmark. Tracking difference is the total gap over a period. A fund can have low tracking error and still fall behind.
How do you check tracking error?
You can find tracking error on a fund company's page or in its annual report. The figure is usually reported for a period, such as a year.
What limits should beginners know?
Perfect tracking is not realistic for a crypto ETF. Cash creation and redemption rules can change, so an older comparison may not hold.
Frequently asked questions
Not by itself. A lower number means the gap moved less, but it does not show whether the fund is ahead or behind.
No. Tracking error is a standard deviation, so it is reported as a positive size. A negative figure from simple return differences is tracking difference.
No. Funds differ in cash holdings, trading costs, and how shares are created and redeemed.
No. Tracking error compares the fund's returns with the coin's returns. Premium or discount compares market price with net asset value.
