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What is a tracking error? Why do you need to know this definition? The MoneySense Glossary is your resource for learning and understanding financial terms.
Tracking error measures the difference between the performance of an index fund and that of the specific index the fund is designed to mimic or “track.” Tracking error results from trading and other costs, as well as differences in timing and construction between an index and the exchange-traded funds (ETFs), mutual funds and other funds that track it.
Example:“Veronica believed that all S&P 500 index funds were identical until she compared the tracking error of different products and discovered that some funds were more successful in mimicking the index than others.”
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