Tracking difference

A realised difference over a stated period, and not the same measure as tracking error, which describes how variable that difference has been. A fund can carry a large and very stable tracking difference with very little tracking error, which is why the two are published separately and why quoting one in place of the other answers a different question.

Four mechanisms produce it and all four are structural rather than accidental, which is why they can be enumerated at all. The expense ratio is deducted from assets continuously. Trading inside the fund costs money whenever the index rebalances its constituents. Withholding tax on dividends depends on where the fund is domiciled and where its holdings are listed, while published index returns rest on a tax assumption that may not match any particular fund. And cash held between flows earns something other than the index return.

The difference does not always run against the holder. A fund that lends its holdings out for a fee returns part of that income to the fund, and a fund that samples an index rather than replicating it fully can land on either side of the published return. A contract for difference written on a fund references the fund's own price, so the whole of this sits inside the price the contract follows rather than beside it.