Measuring performance
Tracking difference
The plain gap between a fund’s return and its index’s return over a period.
How it works
Where tracking error measures the volatility of the gap, tracking difference measures the gap itself — normally slightly negative, roughly equal to the fund’s costs.
It is the more useful of the two for choosing between index funds, because it is what you actually keep or lose.
Where it misleads people
A fund with a lower headline expense ratio can have a worse tracking difference, once securities lending revenue, dividend tax treatment and replication method are accounted for.
Related terms
- Tracking errorHow much a portfolio’s returns deviate from its benchmark, measured as the volatility of the difference.
- Expense ratioThe annual percentage of your money a fund takes to cover its running costs.
- Index fundA fund that aims to match an index rather than beat it, at very low cost.
- Securities lendingLending out shares you own, for a fee, usually to someone who wants to sell them short.
Mentioned in
More in Measuring performance
- Total return
- Unrealised profit and loss
- Time-weighted return
- Yield on cost
- Survivorship bias
- Annualised
- Sortino ratio
- Backtest
All 29 Measuring performance terms · The full glossary, 433 terms
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