1. An index fund with a small tracking error means that 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.

Second, the so-called tracking error refers to the deviation between the return rate of the indexed tracking portfolio and the target index return rate.

Three, index fund tracking errors mainly include:

1, the rate factor determined in the contract;

2. Due to the structural deviation caused by the index fund's inability to completely copy the allocation structure of the underlying index, when some constituent stocks of the index fund are difficult to buy at a fair price due to insufficient liquidity, the index fund 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 establish a series of quantitative models to control and correct the tracking error.

3. Cash retention in the fund portfolio: Since ETFs trade in the primary market by applying for physical redemption, the cash stock in the portfolio is generally 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.