Two metrics that tell you how faithfully an ETF follows its benchmark index — and why even a "passive" fund never perfectly matches its index.
Explore India's ETF Directory →Most investors confuse these two. They measure related but different things. You need both to evaluate an ETF's quality.
Key insight: Tracking difference tells you how much you underperformed. Tracking error tells you how predictably you underperformed. A good ETF has both a small TD (close to zero or even positive) and a small TE (consistent performance).
The annualisation factor of √252 converts daily standard deviation to annual, using 252 trading days in a year. A daily TE of 0.03% becomes an annualised TE of approximately 0.48%.
SEBI mandates AMCs to track against the Total Return Index (TRI) — the index including reinvested dividends — not the price index. This is important. An ETF showing a small gap against the price index may actually have a larger gap against TRI.
These are indicative figures. Always verify the latest data in each AMC's factsheet or AMFI's data portal.
| ETF (Ticker) | Benchmark | TER | Approx 1Y TD | Quality |
|---|---|---|---|---|
| NIFTYBEES | Nifty 50 TRI | 0.04% | −0.04 to −0.08% | Excellent |
| SETFNIF50 | Nifty 50 TRI | 0.07% | −0.05 to −0.10% | Excellent |
| BANKBEES | Nifty Bank TRI | 0.19% | −0.15 to −0.25% | Good |
| GOLDBEES | Domestic gold price | 0.49% | −0.40 to −0.55% | Acceptable |
| LIQUIDBEES | Nifty 1D Rate | 0.19% | −0.15 to −0.22% | Good |
| Sectoral ETFs (avg) | Various | 0.40–0.65% | −0.30 to −0.70% | Variable |
What to look for: For a large-cap equity ETF, a tracking difference worse than −0.30% per year is a red flag. For gold ETFs, up to −0.60% is acceptable given storage costs. Sectoral ETFs with TD worse than −0.80% deserve scrutiny.
AMC Factsheets: Every AMC publishes a monthly factsheet listing the ETF's NAV return vs index return for 1Y, 3Y and 5Y. Download from the AMC website (e.g., nipponindiamf.com, sbiamcmf.com).
AMFI Data Portal (amfiindia.com): Provides NAV history going back years. Download NAV data and compute the return gap against NSE index data.
NSE Website (nseindia.com): Publishes iNAV and historical closing prices. The ETF's closing market price vs NAV also shows premium/discount — a sign of tracking issues in the secondary market.
SEBI Disclosure Norms: Since April 2021, SEBI requires AMCs to disclose tracking error and tracking difference in monthly fact sheets and portfolio disclosures. This has made comparison much easier.
When comparing two ETFs tracking the same index (e.g., NIFTYBEES vs SETFNIF50), the tracking difference is your most actionable metric — it directly tells you which fund has cost you less relative to the benchmark.
Tracking error matters more for tactical traders who switch ETFs frequently, as high TE means unpredictable daily gaps that can hurt short-term strategies.
For long-term buy-and-hold investors, minimise tracking difference. For frequent traders or those using ETFs for hedging, also minimise tracking error.
Bottom line: Between two ETFs on the same index, prefer the one with the lower tracking difference — not necessarily the lower TER. A fund with 0.10% TER but sloppy execution may have a higher TD than a fund with 0.12% TER and excellent operations.