60 second guide to tracker funds Low cost funds see record sales

15 May 2011

Understanding tracker funds and ETFs

Trackers and ETFs are lower cost alternatives to actively managed funds

Investors placed a record amount into low-cost tracker funds over the past three months, according to the latest data from the Investment Management Association (IMA).

As sales of stocks and shares Isa investment funds saw a new high in March 2011, the first three months of 2011 was a bumper period for tracker funds. £824 million was poured into trackers, a staggering increase of £694 million (533%) on the first quarter of 2010.

Dick Saunders, chief executive of the IMA, said that although tracker funds only account for 7% of the total invested in funds, the proportion has been steadily growing over the past two years.

With this in mind, Which? gives you the lowdown on tracker funds, how you can use them and their benefits.

What is a tracker fund?

A tracker fund is a type of investment fund which pools all your money with other investors to be placed in different investment markets. They usually come in the form of unit trusts and OEICs. Traditionally, investment funds are run by a manager or management team, who tactically decide where to invest your money to make a profit.

Trackers are different. The key is in the name – they simply track a particular stock market or investment index and follow what the market is doing. So when the market rises, your investment rises with it. When it falls, your investment falls too. This is known as a passive investment.

What’s an index?

An index is a grouping of assets, like shares or bonds, that is used to measure the performance of a market. Probably the best known example of this is the FTSE 100. This index measures the performance of the 100 largest companies in the UK. It’s based upon the size of those 100 companies – so right now, 7.4% of the FTSE 100 is made up by HSBC, and Schroders accounts for just 0.06%.

How do trackers ‘track’?

One advantage of trackers is their simplicity. To track an index, generally, a tracker fund simply buys all the shares (or other assets, depending on where you want to invest) in that index, in proportion to their size. That way, the fund can closely mimic what the index is doing. You can learn more about this in our guide to understanding tracker funds and ETFs

Why would you invest in a tracker fund?

If you’re just starting out in the investment world, a tracker fund is a good way to dip your toe in the water. But in truth, tracker funds tend to perform better than funds run by managers, as not all managers consistently beat what the market is paying all the time. A few do but they’re hard to find.

Equally as important is that tracker funds are low cost. With an investment fund manager, you’d expect to pay an initial charge of 5% of your investment and an annual charge of around 1.7%. Tracker funds often cost around a third of this, with no initial charge.

Costs can play a huge part in the performance of your investment – you can learn more in our guide ‘are fund charges eating up your returns?’ It seems that with the rise in tracker fund sales, savers are starting to cotton onto the fact that, in many cases, paying for expertise isn’t resulting in success for their investments.

Are there other types of tracker funds?

A relatively new investment, called an exchange traded fund (ETF), is steadily gaining popularity. ETFs are similar to tracker funds but are often even cheaper and offer closer tracking than tracker unit trusts. But there are some other risks that you might encounter, depending on how the ETF tracks.To learn more about this, read our guide to understanding tracker funds and ETFs.

If you want to know more about the different styles of investment, you can read our guide to active vs. passive investment. We always recommend that you seek independent financial advice when thinking about investing your money.