Tracking difference

How far a fund's return finished behind, or ahead of, the index it tracks over a stated period.

Example

A fund returning 6.91% against an index's 7.00% has a tracking difference of minus 9 basis points, against an expense ratio of 5 basis points.

Important

Compare it with the fee. Further behind than the fee means dealing costs, cash drag or sampling; ahead of the fee usually means securities lending income, which comes with a counterparty. This is not the same measure as tracking error.

Related terms

• Tracking error — How much a fund's gap to its index varies over time - the consistency of the shortfall, not its size.
• Expense ratio — The annual fee a fund charges, expressed as a percentage of the money you have in it.
• Securities lending — A fund lending holdings to other market participants for a fee, usually against collateral, generating income the holdings themselves did not produce.
• Index fund — A fund built to track a market index, such as a broad stock index, rather than to beat it.

Lessons that explain it

• Appraising one fund: the holdings file, the rules, and the gap to the index — Seven checks, in order of how much they change what you own. The two everybody runs - the name and the expense ratio - are the two cheapest, and the one nobody runs is where the exposure lives. (14 min)

All 578 terms in the Investing glossary