How Tracker Funds Work For Passive Investors

Tracker funds do what they say on the label – they follow the movements of a specific index, so the value of an investment rises and falls with the value of the underlying index.

Investors who do not want to put a lot of hard work and research into their portfolio like tracker funds as they are passive investments.

A passive investment means you just sit back and hopefully count the money coming in without being involved a whole lot more.

Fund managers have hundreds of trackers. Certainly each major stock market will have a tracker.

In London, trackers follow the FTSE-100 – the 100 largest companies by capital value, another monitors the FTSE-350, the FTSE All-share Index and the Alternative Investment Market (AIM).

Shares and markets

The index works out the average value of shares in the market, so when the TV news says the FTSE-100 has gained or fallen by however many points in a day, what the announcer means is the average value of the shares in that index has risen or dropped.

Tracker funds are generally cheaper investments to buy into than many other funds and bonds because they are tracked electronically. Managers are less hands on, so the fund charges are lower, which makes them popular with investors.

Trackers do not only follow stock markets, they can follow a wide range of different investments, like property values; commodity prices, such as oil, gold or iron ore, and even currencies.

Trackers are often called full or partial replication funds.

For the FTSE-100, full replication simply means the fund has shares in all the companies the index follows, while partial replication only invests in a selection of the companies in the index.

ETFs and ETCs explained

Exchange Traded Funds or ETFS are also often trackers but are set up as funds much like unit trusts.

Because they are traded and listed on stock exchanges, investors can buy or sell in or out of an ETF at any time. The value of an ETF also reflects the underlying value of the investments in the fund it tracks.

ETFs that track commodities are unsurprisingly called Exchange Traded Commodities or ETCs.

Investors often buy into trackers or ETFs because they may not have the funds to invest in the underlying assets themselves.

Trackers and ETFs that invest in commercial property or precious metals pool the resources of lots of investors, whereas few of the investors would have the cash to buy an office block, retail park or resources like oil.