What is a tracker fund?

Letting computers take the strain of investing

1. Back to basics first. A share is a tiny part of a company. Its value (or price) goes up and down in line with whether the company does well or badly. Anyone can buy shares of a publicly traded company (some firms are owned privately).

2. For convenience, the shares of individual companies are sometimes bundled into groups. Then you can get a handy snapshot of how companies in a certain area (or country) are doing by looking at the share performance of the group.

3. These groups are often called indices. The FTSE 100 index, for example, contains the UK’s 100 largest listed companies. It is calculated at different points during the working day to show the average rise (or fall) in the share prices of all 100 of its members.

4. FTSE stands for Financial Times Stock Exchange. It is sometimes referred to as the 'Footsie'. There is a FTSE 250 version (no prizes for guessing how many firms in that) and the FTSE All Share – containing all the tradeable companies in the UK.

5. Investing in lots of single shares by yourself is a faff. Instead, you could pool your money with other investors into a fund run by someone who knows what they’re doing (a fund manager). They invest it for you, hopefully in shares which will do well.

6. This approach, however, costs. Also, even the best fund manager can at times make mistakes and lose your money.

7. Enter the tracker fund. Driven by computers, not humans, this kind of fund does not choose individual shares but simply mirrors the ups and downs of a stock market index. So, imagine you have invested in a FTSE 100 tracker fund. If the index goes up 10%, so does your money. But if the index loses 20%, so do you.

8. The latest variation of the tracker fund is called an ETF (exchange traded fund). Confusingly, these are actually shares but they work in the same way. Tracker funds and ETFs can both be put inside your Individual Savings Account (Isa) which allows various - but not, these days, generous - tax perks on the investment.

9. The debate continues to rage about whether human ('active') or computers ('passive') investing is better. Tracker funds are no safer but they are undeniably cheaper. They can charge as little as 0.1% a year compared with human managers who generally ask for 0.75%. This is important as fees erode your investment returns over time.

10. Want to sign up? The biggest providers of trackers include Fidelity, Legal & General and American newcomer Vanguard. There can be very small differences between funds in performance terms called tracking error. Go for the lowest tracking error you can find at the cheapest price. Generally the best option is to run your investment online via a fund platform offered by the likes of Fidelity, Hargreaves Lansdown or Interactive Investor.


More stuff:

  • All you need to know about passive investing is at lovemoney.com here.
  • For an in-depth comparison of trackers, go to Trustnet here
  • Get help choosing a fund platform with Boring Money's reviews.

 

Last updated 7 March 2018.