Tracking error in index funds

Tue, 12 May 2026 00:00:00 +0000

Tracking error is the annualised standard deviation of the difference between a mutual fund’s periodic returns and the returns of its benchmark index over the same period. It is the primary metric for evaluating how accurately an index fund or exchange-traded fund (ETF) replicates its target benchmark. A tracking error of zero would imply perfect replication, in practice, every fund has some non-zero tracking error driven by costs, cash drag, and rebalancing lags.

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Tracking error in index funds