What is an index tracker fund?
Index tracker funds aim to closely track the performance of an index (such as the FTSE 100) by investing in companies within that index. Since they are passively managed and there is no stamp duty to pay, they are often more cost-effective than funds, which are actively managed by fund managers.
Why invest in index tracker funds?
- Take a more ‘hands off’ approach to investing.
- Easily invest in entire markets, indices, regions and sectors.
- Reduce risk through diversification.
- Lower the cost of building a diverse portfolio.
How index tracker funds work
The investments within an index are mirrored using a very similar weighting. For example, a FTSE 100 tracker fund would invest in all 100 companies, using their weighting within the FTSE 100 to determine representation.
Not all of the investments in an index are held, as it may be costly to invest in the smaller constituents. Investments are chosen to represent industry sectors, for example, if the financial sector represents 26% of the FTSE All-Share index, approximately 26% of the tracker fund would be invested into a selection of financial companies which the fund manager believes will best replicate the sector's performance.
Things to bear in mind
- Tracker funds will follow index performance up AND down.
- If an index is heavily weighted to a particular sector or region, these will have a greater impact on performance.
- The tracking error can be distorted due to the difference in the valuation point of the fund and the index it tracks.
- Some fund managers engage in stock lending, involving higher levels of counterparty risk.
How to invest in index tracker funds
Simply open an account and pay in some money. You’ll then be ready to buy and sell tracker funds online (or over the phone for no extra charge) with us.
Help choosing tracker funds
There are lots of tracker funds out there, so let us help you choose. Our preferred tracker funds are handpicked by our analysts for their tracking ability, strong management and low costs.