Tracking difference is the return of an index fund or ETF minus the return of the index it follows, over the same period. If the index gained 8.00% and the fund gained 7.70%, the tracking difference is minus 0.30 percentage points. Tracking error is a different thing: it measures how much that gap jumps around from one period to the next (technically, the standard deviation of the differences). A fund can have a small tracking difference and a large tracking error, or the reverse. Neither is the same as the TER, which is only the annual fee the fund announces; the tracking difference is what you actually ended up with after all costs and effects.
Worked example
Fund A follows an index. In one year the index returns 8.00% and Fund A returns 7.70%, so the tracking difference is 7.70% minus 8.00% = minus 0.30 percentage points. On 10,000 invested, the index would have grown to 10,800 and Fund A to 10,770, a gap of 30. Fund A announces a TER of 0.20%, so the other 0.10 points came from effects the TER does not show, such as trading costs inside the fund or tax withheld on dividends. Over four years the yearly differences are minus 0.2, minus 0.4, minus 0.2 and minus 0.4. Their average is minus 0.3, each year sits 0.1 away from it, so the tracking error is 0.1 percentage points: the gap is steady, so the fund follows its index in a predictable way.
Why it matters
When you pick an index fund you want it to deliver what its index delivers, so the gap is what you are really paying for. The tracking difference is the number to look at first, because it adds up every cost and effect in one figure. It is usually negative, mostly because of fees. It can be close to zero or even positive when the fund earns a little extra, for instance from lending out the securities it holds (check the fund's documents for how it works). The tracking error tells you how predictable that gap is. Be careful: a past figure is not a promise, it depends on the period you measure, and a short window can mislead. Fund factsheets and the provider's website publish both numbers. A big gap is a question to look into, not a verdict.
Frequently asked questions
Tracking difference is the gap in return between the fund and its index, over a period. Tracking error is how much that gap varies from one period to the next. One is the size of the gap, the other is how steady it is.
No. The TER is the annual fee the fund announces. The tracking difference is what actually happened to the return after all costs and effects, including things the TER does not show, such as trading costs inside the fund. They are often close but they are not the same figure.
Look at the fund's factsheet, its annual report or the provider's website, which usually publish it for one or more years. Compare funds over the same period, because a different window gives a different number.
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Built & maintained by Worthmap · Last updated November 1, 2026
Educational use only. This tool provides estimates for informational purposes and does not constitute financial, investment, tax, or legal advice. Results are based on inputs you provide and mathematical models, they do not guarantee future performance. Always consult a qualified financial adviser before making investment decisions.