Short answer: Tracking difference is the gap between a fund’s return and the return of the index it follows. According to their prospectuses, the cheapest S&P 500 index funds trailed the index by just 0.01 to 0.04 percentage points a year over the ten years to December 31, 2025, and the gap grows almost point for point as fees rise.
An index fund promises to give you the return of its index. It never quite does. Every year, the fund’s return lands a little above or, far more often, a little below the index it follows. That gap has a name: tracking difference.
For the best index funds, the gap is tiny. For others, it’s large enough to matter over a lifetime of investing. This article explains where the gap comes from, shows real numbers from fund prospectuses and SEC filings, and tells you how to check any fund yourself.
If you’re new to index funds, our plain-English guide covers the basics first.
Tracking difference vs. tracking error
Two terms get mixed up constantly:
- Tracking difference is how far the fund’s return ended up from the index’s return over a period. If the index returned 10.00% and the fund returned 9.95%, the tracking difference is −0.05%. This is the number that affects your wallet.
- Tracking error is how much that gap bounces around from day to day. A fund can have a small, steady tracking difference and very low tracking error, or wobble a lot day to day and still end the year close to the index.
The SEC asks every index fund for both in its annual report on Form N-CEN. The form’s wording is precise: funds must provide “the annualized difference between the Fund’s total return during the reporting period and the index’s return during the reporting period,” and “the annualized standard deviation of the daily difference between the Fund’s total return and the index’s return,” each before and after fund fees and expenses (SEC, Form N-CEN).
For a long-term investor, tracking difference is the one to watch.
Why a fund can’t match its index exactly
An index is just a calculation. It doesn’t pay anyone, doesn’t trade, and doesn’t hold cash. A fund has to do all three. The gap comes from a handful of sources:
- Fees and expenses. This is the big one. The expense ratio comes straight out of the fund’s return every year. Our guide to expense ratios explains what it includes.
- Trading costs. When the index adds or removes a company, or when investors put money in or take it out, the fund has to buy and sell, paying commissions and spreads the index never pays.
- Cash drag. Funds usually keep a little cash to handle redemptions. Cash earns less than stocks in a rising market.
- Sampling. Some funds, especially in bond or broad international markets, hold a representative sample of the index rather than every single security. That can push returns slightly above or below.
- Timing and pricing differences. International funds can show large day-to-day gaps because of fair-value pricing and time-zone differences, even if they track well over a full year.
- Securities lending. Many index funds lend out shares for a fee, which can add a small amount back and partly offset costs.
Put together, a well-run index fund should trail its index by roughly its expense ratio, sometimes a bit less.
What the prospectuses show: S&P 500 funds
Every mutual fund and ETF prospectus includes a table of average annual total returns next to its benchmark index. Here’s what that table shows for several S&P 500 index funds, all for periods ended December 31, 2025, from their current prospectuses filed with the SEC:
| Fund (share class) | Expense ratio | 1 year | 5 years | 10 years | 10-year gap vs. index |
|---|---|---|---|---|---|
| S&P 500 Index (no fees) | — | 17.88% | 14.42% | 14.82% | — |
| Fidelity 500 Index Fund (FXAIX) | 0.015% | 17.86% | 14.41% | 14.81% | −0.01 |
| Schwab S&P 500 Index Fund (SWPPX) | 0.02% | 17.88% | 14.40% | 14.78% | −0.04 |
| iShares Core S&P 500 ETF (IVV) | 0.03% | 17.85% | 14.39% | 14.78% | −0.04 |
| Vanguard 500 Index Fund, ETF Shares (VOO), NAV | 0.03% | 17.84% | 14.38% | 14.78% | −0.04 |
| Vanguard 500 Index Fund, Admiral Shares (VFIAX) | 0.04% | 17.83% | 14.38% | 14.78% | −0.04 |
| Nationwide S&P 500 Index Fund, Class R6 (GRMIX) | 0.18% | 17.68% | 14.22% | 14.62% | −0.20 |
| Nationwide S&P 500 Index Fund, Class A (GRMAX), with sales charge | 0.57% + 5.75% load | 10.49% | 12.43% | 13.48% | −1.34 |
Returns are before taxes. For ETFs, returns are based on net asset value (NAV). Figures come from each fund’s summary prospectus on SEC EDGAR; dates are listed in the sources below.
Three things jump out:
- The cheapest funds track almost perfectly. Fidelity’s fund, at 0.015% a year, trailed the S&P 500 by just 0.01 percentage points a year over ten years. The funds charging 0.02% to 0.04% trailed by about 0.04 points. Our comparison of FXAIX, VOO and SWPPX looks at three of them side by side.
- The gap grows with the fee. Nationwide’s R6 class, at 0.18%, trailed by about 0.20 points a year. That’s still a close tracker, but the difference is five times larger than the cheapest funds.
- Sales charges show up too. Nationwide’s Class A shares carry a 5.75% front-end load, and prospectus return tables for Class A shares generally reflect the maximum sales charge. That’s why its one-year return is about 7 points lower than the index and its ten-year gap is well over a point a year. Our article on sales loads on index funds lists which index funds still charge them.
What 0.2% a year adds up to
A gap of a few hundredths of a percent sounds trivial, and for the cheapest funds it is. But it compounds.
Using the ten-year returns above, $10,000 invested at the start of 2016 would have grown to roughly:
| Value after 10 years | |
|---|---|
| The S&P 500 index itself (14.82% a year) | about $39,800 |
| Fidelity 500 Index Fund (14.81% a year) | about $39,800 |
| Schwab, iShares and Vanguard funds above (14.78% a year) | about $39,700 |
| Nationwide S&P 500 Index Fund, Class R6 (14.62% a year) | about $39,100 |
| Nationwide S&P 500 Index Fund, Class A, with sales charge (13.48% a year) | about $35,400 |
These are our own calculations from the prospectus returns, and past performance doesn’t predict future results. But the pattern is the one that matters: same index, same decade, very different outcomes, and nearly all of it explained by cost.
What the SEC data shows across all index funds
Prospectus tables are the cleanest source for individual funds. For the bigger picture, we looked at the tracking-difference answers that index funds give on Form N-CEN.
We took every fund that reported itself as an index fund in its most recent N-CEN (filings from the third quarter of 2025 through the second quarter of 2026), then left out leveraged and inverse funds, funds filing for the first time (which often cover less than a full year), funds reporting zero for both figures, and a small number of obviously impossible values. That left 2,061 index funds.
- Before fees, the typical fund matched its index almost exactly. The median tracking difference before fees and expenses was 0.00%. Half of the funds were within about 0.07 points below and 0.11 points above their index.
- After fees, the typical fund trailed by about 0.19 points a year. The median after-fee tracking difference was −0.19%, and 81% of funds finished behind their index after costs.
- The spread is wide. After fees, only 25% of funds landed within 0.10 points of their index, and about 70% within half a point.
| Type of index fund | Funds | Median before fees | Median after fees |
|---|---|---|---|
| U.S. stock | 1,158 | 0.00% | −0.23% |
| International stock | 478 | +0.12% | −0.25% |
| Bond | 425 | 0.00% | −0.12% |
We grouped funds by the words in their names, so the categories are approximate. International funds show a positive median before fees partly because of the timing and pricing effects described above, and partly because many international benchmarks assume a level of tax withheld on foreign dividends that a fund may not actually pay.
A word of caution about this data
These N-CEN figures are useful in aggregate, but we wouldn’t use them to rank individual funds. The form asks for one answer per fund, while many funds have several share classes with different fees, and it doesn’t say which class to use. Some funds clearly report differently from others: a few report identical figures before and after fees, and a few report values that are obviously not a difference between two returns. That’s why this article uses the funds’ own prospectus tables for the fund-by-fund comparison. Our Editorial Methodology explains how we handle data like this.
How to check any fund’s tracking difference yourself
You don’t need special software:
- Open the fund’s summary prospectus. It’s on the fund company’s website and on the SEC’s EDGAR database.
- Find the “Average Annual Total Returns” table. It shows the fund’s 1-, 5- and 10-year returns next to its benchmark index.
- Subtract. The fund’s return minus the index’s return, for each period, is the tracking difference. Use the 5- and 10-year numbers; one year can be noisy.
- Compare it with the expense ratio. A gap close to the expense ratio is normal. A gap much bigger than the expense ratio is a warning sign worth investigating.
- Check which share class the table shows and whether the returns include a sales charge. Many funds show several classes in the same table.
For ETFs, also compare the market-price return with the NAV return. For large ETFs they’re usually almost identical.
What a good tracking difference looks like
There’s no official standard, but some rules of thumb follow from the data:
- For a broad U.S. stock index fund, a long-term gap of a few hundredths of a percent a year is excellent, and anything close to the expense ratio is normal.
- For bond and international funds, expect a bit more noise from year to year, and judge them over five years or more.
- A fund that consistently trails its index by much more than its expense ratio deserves a closer look: high trading costs, cash drag or a sampling approach that isn’t working.
- A fund that beats its index before fees is usually benefiting from securities lending, sampling or pricing effects. Don’t count on it continuing.
Common questions
Can an index fund beat its index? Yes, occasionally, and by small amounts. Before fees, about half of the index funds in the SEC data reported a return at or slightly above their index. Income from lending securities, favorable sampling or pricing differences can all do it. After fees, most funds end up behind. A fund that beats its index in one year shouldn’t be expected to do it every year.
Is a high tracking error always bad? Not necessarily. Tracking error measures day-to-day wobble. International funds often show high tracking error simply because foreign markets close hours before U.S. funds price their shares. What matters more for a long-term investor is whether the fund ends each year close to its index, which is tracking difference.
Does tracking difference matter inside a 401(k)? Yes, just as much. Your plan’s index fund options still have fees and trading costs. If your plan offers more than one fund tracking the same index, the one with the smaller long-term gap and lower expense ratio is usually the better choice.
ETF market price or NAV? An ETF’s NAV return shows how well the portfolio tracked the index. The market-price return shows what investors actually got trading on the exchange. For large ETFs like the ones in the table above, the two were within a few hundredths of a point.
The bottom line
Tracking difference is the most honest measure of what an index fund actually delivers. For the biggest, cheapest S&P 500 funds, the gap over the last decade was between 0.01 and 0.04 percentage points a year: close enough to call it the index. As fees rise, the gap widens almost point for point, and sales charges widen it much more.
The practical lesson is the same one that runs through every fee analysis on this site: what an S&P 500 index fund charges is the best single predictor of how closely it will follow the index.
This article is general information, not personal advice. Past performance doesn’t guarantee future results. See our Financial Disclaimer.
Sources and data notes
- SEC, Form N-CEN: wording of the index fund tracking questions.
- SEC, Form N-CEN data sets, 2025 Q3 to 2026 Q2: tracking difference answers of index funds, each fund’s most recent report. Excludes leveraged and inverse funds, first-time filers, funds reporting zero for both figures and values beyond ±10 percentage points. Categories are based on fund names. Our own calculations.
- Summary prospectuses on SEC EDGAR, “Average Annual Total Returns” tables for periods ended December 31, 2025: Fidelity 500 Index Fund (April 29, 2026); Schwab S&P 500 Index Fund (February 26, 2026); Vanguard 500 Index Fund Admiral Shares and ETF Shares (April 28, 2026); iShares Core S&P 500 ETF (July 31, 2026); Nationwide S&P 500 Index Fund (March 2, 2026).
- The dollar figures are our own calculations from the ten-year average annual returns in those tables, before taxes.
Data as of the 2026 Q2 SEC data sets. Sources checked on September 30, 2026.