tracking error or R2?

Lets say I have fund A and fund B and both aim to track the S&P500. I want to compare their performance over time and see who did a better job of tracking the Index. Should I compute the standard deviation of the tracking error of both funds compared to their index or execute a linear regression with index returns as the independent variable and fund returns as the dependent variable and look at the R2 of both regressions to see how much the returns of the index can explain the returns of the funds?

• Like the Attack68 said, I think you need to mathematically define it. Do you care about volatility more than return or vice-versa. If you really want to define it mathematically, it really depends on a risk aversion parameter to trade off risk versus return. Then, once you have that parameter, utility to investor is defined mathematically as $\mu$ - $\lambda \times \sigma^2$. – mark leeds Sep 18 '18 at 6:57