Tracker fund

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

Tracker funds (also known as index funds or passive funds) 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). 

The aim is to have as low a tracking difference (the gap between the performance of the index and the fund) as possible. Since the goal of a tracker is to match the index, significant outperformance is as concerning as significant underperformance (even if it might not feel like that to an investor), because it suggests problems with the way the fund is being run. 

Tracker funds can be traditional open-ended funds (unit trusts or open-ended investment companies [Oeics]) or exchange-traded funds (ETFs) listed on a stock exchange. Investment trusts are almost never used as tracker funds because – unlike ETFs – they have no mechanism to keep the fund’s share price in line with the value of its assets.

The first tracker open to ordinary investors was the Vanguard Index fund, which launched in the US in 1975. Rivals were sceptical as to whether it would ever succeed, arguing that people wouldn’t be satisfied with merely matching the market, but the concept caught on.

The big advantage of passive investing is cost: a FTSE 100 tracker fund can have an annual charge of well under 0.1% a year. An actively managed fund could easily charge ten times as much, with no guarantee it will beat the index (most don’t over time). A closet tracker is an active fund that sticks close to its benchmark index to avoid under-performing the market too drastically (and thus losing clients). Investors in a closet tracker are being charged the higher fees of active management in exchange for passive performance or worse.

Recommended

Why it pays to take cries of “bubble” with a pinch of salt
Sponsored

Why it pays to take cries of “bubble” with a pinch of salt

Many observers are pointing to a stockmarket “bubble” – especially in US tech stocks. But, says Max King, just because a lot of people are saying it, …
13 Oct 2020
Why the underperforming Temple Bar investment trust will deliver again
Investment trusts

Why the underperforming Temple Bar investment trust will deliver again

Temple Bar, the value-focused investment trust, has had a dreadful year, but new managers should turn it around.
13 Oct 2020
MoneyWeek’s investment trust portfolio – should we keep the Law Debenture trust?
Investment trust model portfolio

MoneyWeek’s investment trust portfolio – should we keep the Law Debenture trust?

The MoneyWeek’s investment trust portfolio has been performing well. But one trust – Law Debenture – has performed particularly poorly. Merryn Somerse…
6 Oct 2020
Ethical investing: how ethical is your ESG fund?
ESG investing

Ethical investing: how ethical is your ESG fund?

There’s no doubt that environmental and other issues can have a huge impact on share prices – 2020 has proven that beyond doubt. But how can investors…
6 Oct 2020

Most Popular

The Bank of England should create a "Bitpound" digital currency and take the world by storm
Bitcoin

The Bank of England should create a "Bitpound" digital currency and take the world by storm

The Bank of England could win the race to create a respectable digital currency if it moves quickly, says Matthew Lynn.
18 Oct 2020
What would negative interest rates mean for your money?
UK Economy

What would negative interest rates mean for your money?

There has been much talk of the Bank of England introducing negative interest rates. John Stepek explains why they might do that, and what it would me…
15 Oct 2020
Last chance to secure a Bounce Back loan for your small business
Small business

Last chance to secure a Bounce Back loan for your small business

The government’s Bounce Back loan scheme will only run for another six weeks. Act now if you need to take advantage of it.
16 Oct 2020