Understanding Tracking Error in Index Funds

Tracking error is the difference between the performance of an index fund and its benchmark index.

The Role of Fees

Even the cheapest index fund has some expenses, which will always cause it to slightly trail the index.

Sampling and Rebalancing

Some funds use sampling (buying most, but not all, stocks) which can lead to minor deviations in performance.

Dividend Timing

Differences in when an index assumes dividends are paid vs. when the fund actually receives them can cause small tracking gaps.