Mutual Funds & ETFs

How is tracking error calculated?

Tracking error is calculated as the standard deviation of the difference between a fund's returns and its benchmark index returns over a set period. You take the return gap for each interval, daily, weekly, or monthly, then measure how much those gaps vary around their average; the more they scatter, the higher the tracking error. For example, an index fund whose return differences from its benchmark stay within a narrow band shows low tracking error, signalling tight replication. It measures consistency of tracking, not whether the fund beat the index. Qatobit reports its index construction transparently, including how closely holdings follow the stated methodology.