What is tracking error?

Tracking error measures how far a fund's returns deviate from its benchmark index over time.

Quick Definition

Tracking error is the standard deviation of a fund's return relative to its benchmark. A low tracking error means the fund closely mimics the index — key for passive investors.

Use this concept with tools

DCA

Periodic investing with expected annual return.

Fee Drag

Impact of ongoing fees on final value.

ROI + Annualized

Calculate total ROI and annualized return.

NPV

Discounted cashflow valuation.

Related concepts

What is an index fund?

An index fund is a passively managed fund that holds the same securities as a target index (e.g., S&P 500). It aims to match market returns rather than beat them, with low fees.

What is the difference between ETF and mutual fund?

ETFs trade on exchanges throughout the day like stocks. Mutual funds are priced once at market close. Both can track similar indexes, but ETFs generally offer lower costs and intraday flexibility.