An index fund or an ETF’s goal is to track its benchmark index as closely as possible. But cash levels, large inflows and outflows, and expense ratios can lead to a difference in their performances. This variance is measured by a statistic called the tracking error.
The lower the tracking error, the better the passive fund. Typically, it is lesser in schemes tracking large-cap and liquid stocks, compared to their illiquid small-cap counterparts. It is also typically lower in ETFs than in index funds. 
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