Tracking Difference/Tracking Error

Most ETFs are designed to track an index. Tracking difference, simply put, is the disparity between the returns of an ETF and the performance of the underlying index it tracks. In a perfect world, an index-based ETF would deliver exactly the performance of the index minus its fees (the expense ratio). But other factors can contribute to tracking difference, such as trading and rebalancing costs, as well as tracking methodologies that differ from the original benchmark, among other things. Tracking difference is not to be confused with tracking error, which is a measure of how volatile the performance difference between an ETF and its index is—the standard deviation—on an annualized basi