Diego Simeone's Atletico side have made a sensational start in La Liga, winning all six of their games to be sitting two points clear of third-placed Real.
Beating Real in the Copa del Rey in May saw Atletico end a 14-year winless run against their city rivals.
Ancelotti is unsure whether Atletico have overtaken Real, but said there was no doubt his star-studded team had more quality.
"It's hard to say if Atletico are better than us nowadays. They have a solid team, they play nicely together," he said.
"But we are two different teams, with diverse qualities. They are more aggressive and better in physical terms. But Real Madrid has better quality. That's why we are different."
Real have struggled to find their best form under Ancelotti and needed a controversial late penalty to beat strugglers Elche 2-1 on Wednesday.
Ancelotti, who led Paris Saint-Germain to the Ligue 1 title last season, refuses to panic so early in the campaign.
"I'm not worried. Changing things always takes its time," he said.
"It's true that we haven't always played nicely or got the best scores, but we need time to improve. It's just small things we will improve soon.
"We are in the right way to improve because the players understand the idea of playing even though we need to improve few things.
"But we are in the right way to accomplish the expectations."
Ancelotti praised Atletico and said they played like Simeone used to, hailing their tactical ability, concentration and character.
"I can only speak about Simeone from what I have seen of Atletico's football so far," Ancelotti said.
"As a team they have same characteristics as he did as a player. Tactically perfect, always focused and a great spirit. That was Simeone and that is Atletico."
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