Glossary / Markets

Tracking difference

Tracking difference is the gap between a fund's actual return and the return of the index it follows over a period, and unlike the expense ratio it captures every cost and every offsetting gain.

It includes the fee, dealing costs, cash drag, and any income the fund earns from securities lending or recovers through favourable tax treatment.

A fund with a higher fee can have a smaller tracking difference than a cheaper one, which makes it the better measure of what tracking actually cost.

Where people get it wrong

Confusing it with tracking error. Tracking error measures the volatility of the gap; tracking difference measures the gap itself, and the second is what you keep.

Related terms

Expense ratio The expense ratio is the annual percentage of assets a fund deducts to cover its running costs, charged continuously and reflected in the fund's price rather than billed separately. Index fund An index fund is a fund that holds the constituents of a published index in their published weights rather than selecting them, which removes manager judgement and most of the cost that comes with it. Fund domicile A fund's domicile is the country in which it is legally established, and it determines the withholding tax the fund suffers on its holdings and the estate tax exposure of the person who owns it.

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