Tracker funds, index funds, passive funds… They all mean the same thing – but what exactly are they? In this lesson, we’ll take you through how tracker funds work and how they could benefit your investment strategy.
What is a tracker fund?
A tracker fund is an investment fund that mirrors the price performance of an asset or group of different assets. They can track a range of different areas, from an individual sector to an entire stock market index.
For example, a Nasdaq 100 tracker fund will mirror the price movements of the companies in the Nasdaq 100 index. It does this by purchasing shares in the companies that are included in the index relative to their index weighting. Remember, we went through index weightings in Lesson 2, and they determine how indices are calculated.
So, if you invested in a Nasdaq 100 tracker fund, you’ll be able to get exposure to the US tech sector without having to buy individual shares in dozens of different companies – which can help to bring down your upfront costs. When you invest with Moneybox, you’ll always be investing in tracker funds (excluding our Legal & General Cash Trust and the Moneybox Pension BlackRock LifePath funds).
Here are some examples of the tracker funds we offer at Moneybox:
- Fidelity Index World Fund: this fund closely follows the performance of the MSCI World Index, and you’ll get wide exposure to around 1,600 global companies including Amazon, Toyota and Netflix.
- Old Mutual MSCI World ESG Index Fund: this fund tracks the MSCI World ESG Leaders Index and it invests in global companies with the highest environmental, social and governance (ESG) performance rating against their competitors.
- Legal & General Global Technology Index: this fund follows the companies who are pioneering some of the world’s biggest digital trends. You’ll track the performance of companies in the FTSE World Index which are leading the way in information technology – like Apple, Microsoft, and Google.
- Legal & General Global Health & Pharmaceuticals Index: gain exposure to the global healthcare sector by tracking the performance of healthcare, pharmaceutical and biotechnology companies that are included in the FTSE World Index like Johnson & Johnson and Pfizer.
- Fidelity Index Emerging Markets Fund: track companies in emerging markets like Asia, Latin America and Africa which have been selected based on long-term growth. The fund invests in a range of sectors including technology and retail, and includes companies like Samsung, Alibaba and Tencent.
Pros of tracker funds
Here are some of the benefits of tracker funds and how they can help you achieve your investment goals:
- Tracker funds are ‘passive investments’, meaning that you only need to buy shares in the fund itself. You don’t need to worry about choosing which assets go into the fund and you don’t need a high level of financial knowledge, because the fund provider will take care of that for you. 🧑💼
- Tracker funds offer you diversified exposure to the financial markets because their value is determined by the share price of a collection of different companies. So, if one of these company’s stock falls in value, it’s unlikely to have a large effect on the performance of the fund as a whole. Bear in mind that some tracker funds are more diversified than others – for example, an all-world tracker is more diverse than a technology tracker.
- Tracker funds usually offer broad exposure to the financial markets for lower upfront costs than buying each asset individually.
Cons of tracker funds
There are some disadvantages of tracker funds that you should be aware of before you invest:
- Tracker funds won’t grant you direct ownership of any shares or other assets.
- Tracker funds have underlying fees that you’ll need to assess on a fund-by-fund basis.
- Tracker funds don’t let you choose what goes into them, so you can’t personalise your investments. But with Moneybox, you can customise your allocations in our range of tracker funds, so you can invest in the things you care about most.
Passive vs active investments
As you’ve learnt, tracker funds are passive investments – but you might have also heard people talk about active investments. So what’s the difference? Let’s break it down.
Passive investing requires effort at the start – you should research a fund before you choose to invest and you should be aware of the fund’s fees and investment strategy, which you can find in the fund’s key investor information document (KIID). You can usually find KIIDs after a quick internet search, or you can see the KIIDs for the funds we offer in-app or by checking out our fund range.
However, after the initial setup, you really don’t have to do much other than monitoring your investments from time to time and making regular contributions (which helps to achieve the best long-term gains). You’ll leave the fund to do its thing and track the performance of its parent index.
Active investing on the other hand requires constant monitoring as you’re the one buying and selling individual assets. You have to make sure you’re diversified, you have to manage your own risk, and you need to commit a lot of time to analysing, checking and adjusting your investments. This means that to be a successful active investor, you need a high level of financial knowledge – and a lot of spare time!
So, you’ll find that it’s usually only professional investors that get involved with active investing. That’s because these people get paid to make investment decisions and it’s likely that investing is their main source of income.
You’d think that active investors who spend their day managing investments would be great at identifying the stock market’s winners and losers. Surprisingly, research has shown that only 25% of active funds beat the returns of their passive counterparts between 2010 and 2020.*
How to invest in tracker funds
To invest in tracker funds, you’ll need to choose a provider, like Moneybox. One of the ways to invest in tracker funds is through a Stocks & Shares ISA, and you can invest up to £20,000 a year without paying tax on any of your gains.
Question one: Which of these is an example of a tracker fund?
- FTSE 100
- London Stock Exchange
- Fidelity Index World fund
Question two: Which of the following is a benefit of investing in a tracker fund?
- It diversifies your exposure
- It requires constant monitoring
- You get to choose what goes into the fund
Question three: True or false: ‘active funds always outperform passive funds’.
The answers to the quiz are down below.
🎓 You’re halfway through the Investing Academy – nice one! Let’s move onto the risks of investing and how to manage them.
Question one: Fidelity Index World fund
Question two: It diversifies your exposure
Question three: False
All investing should be regarded as long term (minimum five years) and historic performance isn’t a guarantee of future returns. The value of your investments can go up and down, and you may get back less than you invest. We don’t provide investing advice, and investors should make their own investment decisions or contact an independent adviser.