Tracking error: how far a fund trails its index
beginner
Automated material · TradeAlmanac editorial deskDraft prepared by a language model from our stored data; not reviewed by an editor.
An index fund promises to replicate an index. It replicates it approximately, and the size of the divergence is the main measure of the fund's quality.
Where the divergence comes from
The management fee: it is deducted from assets while the index pays nothing. This is the most predictable part of the lag.
Rebalancing costs: when the index composition changes the fund trades, paying commissions and spread.
Dividends: the moment the fund receives and reinvests payouts does not coincide with the moment the index records them.
Partial replication: a fund may hold a sample rather than every security in the index — then the divergence is larger.
What to compare against
A total return index, not a price index: the fund receives dividends, and comparing against a price index shows a false outperformance — The MOEX Russia Index: what it measures.
Separately: price versus assets
The exchange price of a unit can differ from net asset value per unit. The gap is usually small thanks to the market maker, but it widens in moments of stress — The market maker: who holds the book when nobody is trading.
Buying a unit at a noticeable premium to assets means an overpayment that no future growth will return.
What to check
The declared fee, the actual lag over several years, and the price-to-assets gap in calm conditions. Related: BPIF, ETF and mutual fund: three forms of one idea.
Draft prepared by a language model from our stored data; not reviewed by an editor.
Model: claude-opus-5
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