Tracking error

How much a fund's gap to its index varies over time - the consistency of the shortfall, not its size.

Example

A fund 20 basis points behind its index in each of five consecutive years has a large tracking difference and a very small tracking error.

Important

The two terms are used interchangeably in marketing material and they mean opposite things. A fund can be admirably consistent and still cost you 20 basis points every single year; check which measure is being quoted before drawing any conclusion from it.

Related terms

• Tracking difference — How far a fund's return finished behind, or ahead of, the index it tracks over a stated period.
• Index fund — A fund built to track a market index, such as a broad stock index, rather than to beat it.
• Expense ratio — The annual fee a fund charges, expressed as a percentage of the money you have in it.

Lessons that explain it

• The curve, and why a fund can lag the price it tracks — Spot is set by physical supply and demand. Everything dated is set by the cost of carrying the good to that date - and when the curve slopes upward, a fund that holds contracts loses money every time it rolls, even with the price standing perfectly still. (12 min)
• 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