An important metric for Index funds. From a broad perspective, tracking error is the annualised standard deviation of returns between the fund and the benchmark that it is supposed to track.

In simple terms, It is the difference in performance between the fund and its benchmark. The purpose of an index fund is to track the benchmark one to one in terms of both volatility and performance. Theoretically the best tracking error is 0, but costs related to handling and managing funds lead to non zero tracking errors. A low tracking error should be looked for when investing into any index fund.