The demand from consultants and clients for zero tracking error drives him to a sub-optimal solution.

FORBES: Getting Over Index Investing With A Better Way

In order to achieve zero tracking error, the fund manager must hold exactly the index for every second of the day.

FORBES: Getting Over Index Investing With A Better Way

Zero tracking error trumps total return as the performance standard.

FORBES: Getting Over Index Investing With A Better Way

The expectation that an index fund will get EXACTLY the return of the target index sets the stage for an interesting problem: Zero tracking error is achievable, but it comes at a very high price.

FORBES: Getting Over Index Investing With A Better Way

With three of the country's banks now nationalized and their market caps reduced to zero, the OMXI15, an index tracking Iceland's 15 biggest shares, had to be recalculated, so some traders were confronted with a startling 76.0% drop in leading shares.

FORBES: Market Scan