GLOSSARY TERM
Tracking Difference
Tracking difference shows how much a fund or ETF’s return differs from the return of the index it is supposed to follow.
What does this mean in practice?
If an index goes up by 10% but the ETF returns 9.7%, the tracking difference is -0.3%. This difference can happen because of fund fees, taxes, trading costs and the way the fund is managed. A small tracking difference is normal. In general, the smaller it is, the more closely the fund is following its index.
Example
An ETF aims to track a world stock index. Over one year, the index returns 8.0%, but the ETF returns 7.8%. The tracking difference is -0.2%.
Why it matters
Tracking difference helps you see how well an index fund or ETF is actually doing its job. For a long-term investor, even small gaps can matter over time, especially when comparing similar low-cost funds.
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