Tracking difference occurs when the performance of an exchange traded fund (ETF) does not match the performance of the index which it tracks.
Tracking difference is typically negative, with ETFs delivering returns which are lower than the tracked index would lead you to believe.
The primary cause of tracking difference is the deduction of adminsitrative fees such as fund’s total expense ratio (TER) and rebalancing fees. Transaction costs also affect an ETF's final performance.
Other possible causes of tracking difference are poor ETF performance or extraordinary index performance, in which case the ETF is not able to deliver returns in keeping with those indicated by the index.
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