The tracking error of index fund refers to the deviation between the return rate of index fund and the return rate of target index, which is used to describe the closeness between fund and target index and reveal the fluctuation characteristics of fund return rate around the return rate of target index. Generally speaking, the accuracy of tracking error is related to the length of observation period. The longer the observation period and the more observation points, the more accurate the calculated tracking error will be.

Simply put, tracking error is the deviation between the trend of index fund and the trend of index it tracks. For example, in a year, the Shanghai and Shenzhen 300 Index rose by 20%, while a fund tracking the Shanghai and Shenzhen 300 Index only rose by 15%, which means that there is a great tracking error. This situation is very unfavorable to investors, so the smaller the tracking error, the better.

It is difficult for any index fund to completely synchronize with the benchmark index, so the tracking error is absolute. The main factors that affect the tracking error of index funds include fund position changes caused by investors' subscription and redemption, index component adjustment, suspension, trading restrictions, stage structure differences caused by index enhancement, cost differences caused by insufficient liquidity of index components, dividend distribution of index components, revaluation and gains and losses caused by various expenses.

How is the tracking error generated?

There are many reasons for the tracking error of index funds, such as large purchase and redemption, stock dividends, changes in index constituent stocks, fund rates and so on.

The following is a simple reference to large purchases. In order to cope with investors' subscription and redemption, index funds usually reserve a part of the cash ratio. Suppose an index fund has performed very well recently, attracting a large number of investors to apply. However, it takes time for fund managers to use these funds to buy stocks. If there are too many funds, or the market rises sharply in the short term, index funds will lag behind the index.

How to query the tracking error?

We can inquire through the periodic reports of index funds. For each index fund, the fund company will regularly publish reports, mainly including: quarterly report, 1 semi-annual report, 1 annual report. The fund report can be found in the fund official website and the consignment platform. The query method is usually to find a specific index fund, and then search in turn: fund file → fund announcement → periodic report, and different platforms may be slightly different.