THE GLOSSARY · INVESTING
Tracking error
Two funds track the same index and do not return the same thing. The difference has a name, a cause and a size — and you pay it every year.
You compare two funds. Same index, same promise, and yet two different returns over five years. What separates them is called tracking error: the difference between what the index does and what the fund meant to reproduce it does.
No fund sticks perfectly to its index, and you are the one paying the gap without seeing it go. It pays fees, it buys and sells at real prices, it holds a little cash, it receives dividends with a lag. Each of those gestures takes a fraction of a point from you.
| On $10,000, five years | Annual return | Result |
|---|---|---|
| The index | 7.20% | $14,157 |
| Unhedged fund | 7.11% | $14,098 |
| Currency-hedged fund | 6.96% | $13,999 |
Nine hundredths of a point for the first, twenty-four for the second. Picking the second costs you $98 over five years, and it has nothing to do with the quality of the index: currency hedging takes about 0.15 of a point a year from you, every year, whether it serves you or not.
In Yoseri, you compare your funds tracking the same index on the Investments page, with their gap over the available history — and the confidence that goes with it when that history is too short to conclude.
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