A deliberately simple thought experiment
Imagine Fund A trails a benchmark by exactly the same small amount in every observation. Fund B sometimes leads and sometimes trails by much larger amounts. A has a steadier gap; B has a more variable gap.
This thought experiment explains variability, not an official tracking-error calculation. Formal disclosures use specified return frequencies and annualisation methods. A few invented observations should not be presented as a compliant published measure.
Read the sign before ranking
Illustrative annual comparison: if an index returns 10% and a fund returns 9.7% over the same dates, the fund-minus-index difference is −0.3 percentage points. A source using index-minus-fund would display +0.3. The underlying shortfall is the same.
That sign convention matters when a table labels a number without explaining the subtraction order. It also matters whether the benchmark includes reinvested distributions and whether the fund figure refers to the plan you actually hold.
Use both questions
Ask how large the gap was, then ask how consistently the scheme followed its benchmark. Expenses, cash balances and execution can influence tracking; a fee figure alone cannot reproduce the whole history.
Keep the time window consistent and compare like instruments. A one-year measure for one fund and a longer-period measure for another do not create a clean ranking. Neither measure promises that next year’s tracking will repeat the past.