Tracking Difference
The real, measured gap between what the fund actually returned and what its benchmark returned.
TER tells you the *stated* annual cost. Tracking difference tells you what actually happened: the fund's realized return minus the benchmark's realized return, over the same period. In an ideal world these would be identical (fund return = benchmark return - TER), but real funds also earn securities-lending income, incur trading/rebalancing costs, and face sampling effects — any of which can make the real gap larger or, sometimes, smaller than TER alone would suggest.
Tracking Difference
Fund's Actual Return - Benchmark's Return
A fund with a 0.10% TER but -0.25% tracking difference is costing you more, in practice, than the sticker TER implies.
What eats into the gap between benchmark and fund
1
Benchmark Return
The index itself, on paper
2
- TER, trading costs
+ securities-lending income
3
Fund's Actual Return
What you really got
Key takeaways
- This is the more honest, complete measure of a fund's real cost — TER is a useful shortcut, but tracking difference is what actually happened to your money.
- A consistently *positive* tracking difference (fund beating its benchmark) does happen — usually from securities-lending revenue the fund passes back — and isn't a red flag, just worth understanding why.