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Tracking error
How far an index fund's return drifts from the index it copies.
Example. A low tracking error means the fund closely mirrors its index.
Tracking error is the small gap between an index fund’s return and the index it is meant to copy, caused by costs and cash holdings. The lower it is, the more faithfully the fund mirrors its index, which is exactly what you want from a passive fund.
Questions people ask
What is tracking error?
The gap between an index fund's return and the index it is meant to copy, caused by fees and cash holdings. A lower tracking error means a closer match.
Why does tracking error matter?
For a passive fund, the whole point is to mirror its index. A low tracking error means it is doing that job faithfully.
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