The so-called tracking error refers to the deviation between the return rate of the indexed tracking portfolio and the target index return rate. The smaller the tracking error, the better the operation of the index fund, which can better reflect its ability to track the index return level. There are two main reasons for the tracking error of index funds besides the rate factor established in the contract.

The first is the structural deviation caused by the index fund's inability to completely replicate the underlying index allocation structure. When some constituent stocks of index funds are difficult to buy at fair prices due to lack of liquidity, index funds will only adopt the method of sampling and copying to increase the weight of active stocks and reduce the weight of illiquid stocks. In this process, the index fund management team needs to control and correct the tracking error by establishing a series of quantitative models. The correction of replication errors is a great test of managers' ability.

Another error factor is the cash retention in the fund portfolio. At this point, ETF funds have certain advantages. Since ETFs are traded in the primary market by applying for physical redemption, the cash stock in the portfolio will generally be very low, and the tracking deviation caused by the inconsistency between the return rate of the benchmark index and the cash return rate will be smaller.