Factor Investors: Three Ways Tracking Error Keeps an Investment Strategy on Course

When in the pursuit of enhanced risk-adjusted returns, investors with strong convictions are often drawn to factor investing—tilting portfolios toward a particular factor like value, low volatility, or dividend yield. While it may seem counterintuitive, a factor portfolio’s tracking error is a useful tool for ensuring they’re not taking on too much risk or unintended exposure in an attempt to generate benchmark-beating returns.