Published Jul 1, 2026 4 Min Read

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Introduction

Tracking difference shows how closely an ETF or index fund matches the performance of its benchmark index. A smaller tracking difference generally means the fund has followed the index more closely. When you invest through the Bajaj Broking website, you can compare index funds and ETFs before making your investment decision.

  • Tracking difference measures the difference between the fund's return and the benchmark index's return.  
  • It is usually measured over a specific period such as 1 year, 3 years, or 5 years. 
  • A lower tracking difference generally indicates that the fund has replicated the benchmark more efficiently. 
  • Costs such as the expense ratio, cash holdings, and trading expenses can increase tracking difference. 
  • Most mutual fund schemes on the platform support SIP and lumpsum investments. SIPs can start from Rs. 100 per month. 
  • You can choose from 4,000+ mutual fund schemes across equity, debt, hybrid, ELSS, thematic, and NFO categories. 

Complete your mandatory KYC and compare index funds and ETFs on the Bajaj Broking website before starting your investment journey.

What is tracking difference?

Tracking difference is the difference between the return generated by an ETF or index fund and the return generated by its benchmark index over the same period. It shows how closely the fund has matched the benchmark's performance.

For example, if an index delivers a return of 12% in one year and the ETF delivers 11.6%, the tracking difference is 0.4%. A smaller difference generally indicates that the fund has tracked the benchmark more closely.

Tracking difference is commonly used to evaluate:

  • Index funds 
  • Exchange Traded Funds (ETFs)  
  • Passive investment strategies 

Although passive funds aim to replicate an index, they rarely deliver returns that exactly match the benchmark because of costs and operational factors.

How do you calculate tracking difference for ETFs?

You can calculate tracking difference in a few simple steps using the returns of the ETF and its benchmark over the same period.

  1. Select the ETF and its benchmark index for the same time period. 
  2. Find the total return generated by the ETF. 
  3. Find the total return generated by the benchmark index. 
  4. Subtract the ETF return from the benchmark return. 
  5. Compare the result across different periods such as 1 year, 3 years, or 5 years. 

Formula

Tracking Difference = Benchmark Return − ETF Return

Example

ParticularValue
Benchmark return15.00%
ETF return14.60%
Tracking difference0.40%

A lower tracking difference generally indicates that the ETF has followed its benchmark more efficiently.

What causes tracking difference?

Even though index funds and ETFs aim to match their benchmark index, their returns may differ slightly. This difference is known as tracking difference and can arise because of several operational and cost-related factors.

FactorHow it affects tracking differenceImpact
Expense ratioThe AMC deducts the annual expense ratio from the fund's assets, which reduces returns.Higher expense ratio can increase tracking difference.
Cash holdingsA fund may temporarily hold cash instead of remaining fully invested.Cash may not move in line with the benchmark.
Rebalancing delayThe fund may take time to buy or sell securities after the benchmark changes.Temporary mismatch with the index.
Trading costsBrokerage, taxes, and other transaction costs reduce fund returns.Can increase tracking difference.
Dividend timingDividends received by the fund may not be reinvested immediately.Short-term return differences may occur.
LiquiditySome securities may be difficult to buy or sell at the desired price.Can affect portfolio replication.

A small tracking difference is common in passive funds. When comparing ETFs or index funds, it is useful to look at tracking difference over different periods rather than focusing on a single month.

Tracking difference vs Tracking error – Are they the same?

Tracking difference and tracking error are related, but they measure different things. Understanding the difference helps you compare passive funds more accurately.

FeatureTracking differenceTracking error
MeaningDifference between fund return and benchmark returnConsistency of the difference over time
What it measuresReturn gapVolatility of the return gap
Expressed asPercentage returnStatistical measure (standard deviation)
FocusActual performance differenceStability of fund replication
Lower valueGenerally preferredGenerally preferred

For example, an ETF may consistently underperform its benchmark by 0.30% every year. This represents the tracking difference. If the difference remains almost the same every year, the tracking error may still be low because the variation is small.

When comparing passive funds, it is useful to review both measures instead of relying on only one.

How can you reduce the impact of tracking difference?

You cannot completely eliminate tracking difference, but you can choose funds that have consistently followed their benchmark closely over time.

Here are some practical ways to reduce its impact:

  • Compare tracking difference over 1-year, 3-year, and 5-year periods. 
  • Check the fund's expense ratio because higher costs can reduce returns. 
  • Compare similar ETFs and index funds before investing. 
  • Review the fund's investment objective and benchmark index. 
  • Avoid making decisions based only on short-term performance. 
  • Monitor your investments regularly using the Dashboard, Portfolio, Orders, and MF Profile available on the Bajaj Broking website. 

A small tracking difference is generally expected in passive investing. Instead of looking for a fund with zero tracking difference, focus on funds that have maintained a consistently low difference over longer periods.

Conclusion

Tracking difference measures how closely an ETF or index fund follows its benchmark index. A lower tracking difference generally indicates that the fund has replicated the benchmark more efficiently, although some difference is normal because of expenses, cash holdings, and trading costs.

If you are comparing passive funds, review both tracking difference and tracking error before investing. On the Bajaj Broking website, you can explore 4,000+ mutual fund schemes across equity, debt, hybrid, ELSS, thematic, and NFO categories. After completing your mandatory KYC, you can invest through SIP or lumpsum. SIP investments start from Rs. 100 per month for most schemes.

Frequently asked questions

What is tracking difference in ETF investing?

Tracking difference in ETF investing is the difference between an ETF's return and the return of its benchmark index over the same period. A smaller tracking difference generally means the ETF has replicated the benchmark more closely. When comparing ETFs on the Bajaj Broking website, reviewing tracking difference can help you evaluate passive fund performance.

Is tracking difference the same as tracking error?

No. Tracking difference measures the return gap between a fund and its benchmark, while tracking error measures how consistently that gap changes over time. Both metrics are useful, but they provide different information about an ETF or index fund's performance.

What causes a high tracking difference in index funds?

A high tracking difference may result from the expense ratio, cash holdings, trading costs, rebalancing delays, dividend timing, or liquidity constraints. These factors can prevent an index fund from matching its benchmark exactly. The Bajaj Broking website provides access to a wide range of passive funds managed by their respective AMCs.


How do I calculate tracking difference for a mutual fund?

You can calculate tracking difference by subtracting the mutual fund's return from the benchmark index's return over the same period. For example, if the benchmark returns 10% and the fund returns 9.6%, the tracking difference is 0.4%.

Is a positive tracking difference good for ETF investors?

Whether a positive tracking difference is favourable depends on how the calculation is presented. Most investors prefer a smaller absolute tracking difference, as it indicates that the ETF has closely followed its benchmark over time.

Which Indian ETFs have the lowest tracking difference?

Tracking difference varies across ETFs and changes over time. You should compare funds over 1-year, 3-year, and 5-year periods instead of relying on a single observation. The Bajaj Broking website lets you compare multiple ETFs and index funds before investing.


Does tracking difference affect long-term returns in index investing?

Yes. Even a small tracking difference can affect long-term returns because the return gap may accumulate over many years. Comparing tracking difference across different time periods helps you choose a passive fund that has consistently tracked its benchmark.

Should I switch ETFs if the tracking difference is too high?

Not always. Before switching, compare the ETF's long-term tracking difference, expense ratio, investment objective, and tracking error. A temporary increase may not justify changing your investment. Consider the overall consistency of the fund before making a decision.

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