ETFs and indices · updated October 21, 2026
What is the tracking error of an ETF
Tracking error shows how much an index fund's return strays from the index's return, from one day to the next. The smaller it is, the more faithfully the fund copies the index.
Tracking error formula
- Fund and index returns
- Measured over the same periods (days, weeks or months).
- Standard deviation
- How spread out the gaps between them are; scaled to a year.
- Tracking difference
- Another useful figure: how far the fund fell behind the index over a whole year. It includes the cost (TER).
Worked example
The index rose 10% in a year. ETF A rose 9.9%, ETF B 9.4%.
On $10,000, the gap between the two means $50 a year, adding up year after year.
How to read tracking error
For an investor, the one-year tracking difference is usually more useful: it tells you directly how much you lost or gained against the index. Sometimes it even comes out better than the TER, thanks to the fund's income from lending out shares.
When tracking error can fool you
Short-period figures: over one month, dividends paid on different dates can show a big gap that later closes. Index with or without dividends: compare the fund with the "with dividends" (net total return) version of the index.
Related terms
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Questions about tracking error
Where does tracking error come from?
From the yearly cost, the cash held in the fund, withholding tax on dividends and the fact that some funds do not buy every single stock in the index.
Where do I find the figure?
In the issuer's reports and on the fund's factsheet. ETF comparison sites often show the tracking difference over recent years.
These explanations are for information only. They are not a recommendation to buy or sell.
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