Which asset class had the most tracking error?

Question

Versus it's index: AKA: LCV vs. Russel 1000 Value

Rephrase: Which asset classes are inherently efficient and in what order? (1st. LCV 2nd ...)

Answer 1

versus what?

On average, asset classes when taken as a whole should have zero tracking error versus their own benchmarks because in aggregate they make up the benchmark. The only way that doesn't work is when managers are trying to boost alpha through out of benchmark exposure. We've seen a lot of that in good old boring large cap growth. After watching small and mid cap outperform over and over again, and value outperform over and over again, many large growth guys are shopping in lower cap value names in an attempt to boost returns.

Answer 2

The question makes no sense. (Relevant) index returns are a proxy for asset class returns (say, S&P 500 is a proxy for large-cap U.S. equity). Tracking error is computed against the index. So the tracking error of asset class equals the tracking error of the index, which is by definition zero...