Glossary › Tracking Error
Tracking Error
The annualised standard deviation of the gap between fund return and benchmark return — how predictably the fund deviates.
Formula
TE = stddev(fund daily return − benchmark daily return) × √252
Intuition
If a fund had a steady 2% per year over its benchmark with low TE, it's a very consistent active manager. If two funds have the same outperformance but very different TE, the lower-TE one delivered it more reliably.
What to look for
Index funds aim for TE near zero. Active equity funds typically run 3–6% TE; concentrated funds can be 8%+. High TE isn't bad in itself — it just means the fund is taking real bets vs the benchmark.
Caveats
TE measures variability, not direction. A fund can have a low TE and still consistently underperform. Always read TE alongside the fund's actual outperformance.