Tracking error

Tracking error is the annualised standard deviation of the periodic (usually daily or monthly) return differences between a fund and its benchmark. It captures how much the gap between fund and index fluctuates, not how large it is on average; that average is the tracking difference. A fund that lags its index by exactly 0.2% every year has a large cumulative tracking difference but a tracking error close to zero.

For physically replicated index funds tracking error is typically small. Sampled and synthetic funds, funds holding illiquid markets, and any fund with significant cash or fair-value pricing show more. For active funds the same quantity is called active risk and is deliberately non-zero: it is the room the manager takes to differ from the index.

Why it matters

Tracking error tells a passive investor how faithfully a product delivers index returns week to week, and it tells an analyst how "active" an active fund really is. Very low tracking error in a fund charging active fees is a sign of closet indexing. In quant research it is the denominator of the information ratio.

In the API

FundFacts API does not return a pre-computed tracking error, but it returns the inputs: the benchmark name and the fund and benchmark return series.

json
{
  "benchmarkName": "FTSE All-World Net TR Index",
  "calendarReturns": {
    "years": [2021, 2022, 2023, 2024, 2025],
    "fund": [20.1, -12.9, 21.7, 17.2, 10.8],
    "benchmark": [20.3, -12.7, 21.9, 17.4, 11.0]
  }
}

Example values. Annual data gives only a rough estimate; for a proper figure use a daily NAV series against the index.

Common pitfalls

• Tracking error and tracking difference are routinely confused in marketing material. Check which one a factsheet quotes.
• Compare tracking error across funds only with the same frequency and window.