Why two ETFs tracking the same index can deliver different returns

explainerPublished 19 October 20262 min readequities

Key points

• Tracking difference is the gap between the fund’s return and the index’s return over a period. Tracking error describes how variable that gap is.
• Ongoing charges, withholding tax, replication, securities lending and currency hedging can all open a gap.
• The ICI statistics page, checked on 19 October 2026, points to the Fact Book and requires permission to reproduce material. This note does not copy an expense ratio or a flow from that page.

What is going on

A physical fund holds securities. A synthetic fund uses a swap or similar contract with a counterparty, so it adds that counterparty to the index exposure. Sampling means the fund holds a subset and accepts a difference. Securities lending can offset some costs and can fail. A hedged share class adds currency forwards. Domicile changes which withholding tax applies to dividends. The market price of an exchange-traded fund can sit above or below net asset value when the creation and redemption mechanism is strained.

Why it matters

A fee difference is a percentage-point gap in the ongoing charge, not a promise about which fund will win. Suppose one fund’s ongoing charge is 0.20 percent a year and another’s is 0.05 percent. The difference is 0.15 percentage points a year before any other gap. Over a short period a premium, a tax drag or a sampling miss can be larger than that fee. The figures in this sentence are an illustration of units, not a pair of real funds.

What to watch

Read the key information document or the prospectus for the share class you can actually buy: the index, the charge, the domicile, the replication and whether the class is hedged. Compare total return, not a distribution yield, when the question is growth of wealth. Distribution yield can be high because the price fell.

Risks

Past tracking difference is not a contract. The index provider can change the rules. Lending income can reverse. A synthetic structure depends on the counterparty. This note does not rank issuers.