GLOSSARY TERM
Tracking Error
Tracking error shows how consistently a fund or ETF follows its index over time.
What does this mean in practice?
While tracking difference looks at the size of the gap between a fund and its index, tracking error looks at how much that gap moves around. A fund with low tracking error follows its index in a steadier and more predictable way. A fund with higher tracking error may sometimes be close to the index and sometimes further away. This can happen because of trading costs, cash holdings, rebalancing, or the way the fund is built.
Example
Two ETFs follow the same index. Both may lag the index slightly over time, but one does so very steadily while the other moves away from the index more unevenly. The steadier ETF has lower tracking error.
Why it matters
Tracking error helps you understand how reliably a fund follows the market it promises to track. For long-term investors, lower tracking error usually means a more predictable index-tracking experience.
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