Index fund

Index funds (also known as passive funds or "trackers") aim to track the performance of a particular index, such as the FTSE 100 or S&P 500.

Index funds (also known as passive funds or "trackers") aim to track the performance of a particular index, such as the FTSE 100 or S&P 500. The funds may hold all or a representative sample of the stocks in the underlying index ("physical replication", or replicate the performance of the index via buying derivatives ("synthetic replication").

Advertisement - Article continues below

The aim is to have as low a tracking error (the difference between the performance of the index and the fund) as possible. So a tracker that returned 5%, when the market only went up by 4%, would raise serious questions, even though it beat the market.

Tracker funds can be open-ended funds (Oeics) or stock-exchange listed funds (exchange-traded funds, or ETFs).

The first tracker open to ordinary investors was the Vanguard Index fund, which launched in 1975. Rivals were sceptical as to whether it would ever succeed, arguing that people wouldn't be satisfied with merely average performance, but the concept has caught on (particularly as active managers often fail to beat the market).

A big advantage of passive investing is cost - for example, the BlackRock 100 UK Equity Fund, which tracks the FTSE 100, charges just 0.07% a year. A typical active fund could easily charge ten times as much, and often significantly more.

A "closet tracker" is an actively managed fund that "hugs" the underlying index in order to avoid underperforming the market too drastically (thus losing clients). This is a subjevt of increasing controversy in the financial industry, with regulators across Europe looking into the issue. In effect, investors in a closet tracker are being charged the high fees of active management in exchange for passive performance





A bond is a type of IOU issued by a government, local authority or company to raise money.
19 May 2020

Quantitative investing

Quantitative investing uses sophisticated computer-based mathematical models to identify and carry out trades.
8 May 2020

Quantitative easing (QE)

Quantitative easing (QE) involves electronically expanding a central bank's balance sheet.
8 May 2020

Emerging markets

An emerging market is an economy that is becoming wealthier and more advanced, but is not yet classed as "developed".
24 Jan 2020

Most Popular

EU Economy

Here’s why investors should care about the EU’s plan to tackle Covid-19

The EU's €750bn rescue package makes a break-up of the eurozone much less likely. John Stepek explains why the scheme is such a big deal, and what it …
28 May 2020
Industrial metals

Governments’ money-printing mania bodes well for base metals

Money is being printed like there is no tomorrow. Much of it will be used to pay for infrastructure projects – and that will be good for metals, says …
27 May 2020

As full lockdown ends, what are the risks for investors?

In the UK and elsewhere, people are gradually being let off the leash as the lockdown begins to end. John Stepek looks at what risks remain for invest…
29 May 2020