Tracking Difference
The gap between a passive fund's return and its index's return over a period.
Formula
Tracking Difference = Fund Return - Index Return over the same period
Unit
%
In depth
Tracking difference measures the average shortfall while tracking error measures its variability, and the two answer different questions — an investor cares more about the first, because it is what was actually given up. It should be close to the expense ratio; a difference much larger indicates cash drag, poor replication, or costs from index rebalancing. Occasionally it is positive, usually from securities lending income or favourable rebalancing execution. Comparing two index funds on the same index means comparing tracking differences, not marketing material.
Worked example
A fund returns 11.4% while its index returns 12.0%, a tracking difference of -0.6 percentage points against a stated expense ratio of 0.20%. The unexplained 0.4 points is where the replication question lies.
Illustrative figures, chosen so the arithmetic is easy to follow. Not a live price and not a valuation of any company.
Educational reference only
This entry explains what “Tracking Difference” means. It is not investment advice and not a recommendation to buy or sell any security. Any numbers above are illustrative, not live prices, and nothing here predicts price direction or rates a stock. Consider your own circumstances and consult a SEBI-registered investment adviser before acting.