If you’re trying to decide which index tracker to invest in, make sure you understand the differences in the funds giving you exposure to the index.
Capital at risk.
The value of investments can fall as well as rise and you could get back less than you invest. If you’re not sure about investing, seek independent advice.
What you’ll learn:
- What types of investments give you exposure to indices
- How tracker funds work
- How to figure out which type of tracker is most suitable for you.
Let’s say you decide to add a tracker fund to your portfolio. You log into your investing account, search for ‘index trackers’ and end up with a long list of potential investments.
It’s important that you choose the right one to suit your needs. But first, you must make sure you understand these types of funds, which are sometimes referred to as ‘passive’ funds.
What is a tracker fund?
These funds are described as ‘passive’ investments as they simply aim to replicate the performance of a benchmark or market index, for example the FTSE 100 in the case of an index tracker.
As they are run using computer algorithms rather than with costly research and managers, these funds are cheaper than the actively managed funds, and offer a cost-effective option to use as a key part of a diversified portfolio. But it’s important to understand that unlike an actively managed fund, a tracker can never outperform the market or index it is linked to – as the name suggests, it will only ever follow it.
Tracker funds can be structured as a unit trust or open-ended investment company (OEIC), or as an Exchange Traded Fund (ETF).
While unit trusts and OEICs are valued and dealt with the manager once a day based on the value of the underlying assets held by the fund – ETFs are bought on the stock exchange at any time throughout the day just like shares.
Besides tracking an index, OEICs and unit trusts can also be made up of portfolios that invest in shares, bonds, property, commodities, or a combination of different asset classes.
Find out more about OEICs and unit trusts
Meanwhile exchange-traded funds (ETFs) track many other areas of investing as well as major markets like the FTSE100 and major US indices. You will find many which track niche industry benchmarks which let you invest in all kinds of specialist areas.
Which tracker fund is right for you?
You should carefully weigh up the advantages and disadvantages of the different funds before you invest in a tracker. The lower cost of an ETF may appeal, then again, you might be willing to pay more for an OEICs or unit trust if that’s your preference.
Whichever option you choose, your money will be at risk. The value of the underlying investments in any type of index tracker may fall and you could get back less than you invest.
Many tracker funds and ETFs can be held in an Individual Savings Account (ISA), enabling investors to benefit from tax-free income and capital gains. However, remember that tax rules of ISAs can change and that the value of their favourable tax treatment depends on your individual circ*mstances.
You may also be interested in
The value of investments can fall as well as rise. You may get back less than you invest.
Investment Account
A fully flexible way to invest
Funds, ETFs and Investment Trusts
If you're starting to build your portfolio, these often low-cost options can help make sure you’re sufficiently diversified from the outset.
Investments explained
You can choose from thousands of investments to build a portfolio to match your needs, and with our expert insight, tools, tips and more, we can help guide you on your investment journey, although we can’t advise you on investments that might be suitable for you.
Important information
Certainly! The article delves into investments, particularly focusing on index trackers like funds, ETFs (Exchange Traded Funds), and investment trusts. Here's a breakdown of these concepts:
Tracker Funds:
- Definition: These are passive investments that aim to mirror the performance of a specific benchmark or market index (e.g., FTSE 100). They don't rely on active management but rather employ algorithms to replicate the index.
- Key Points:
- They're cost-effective compared to actively managed funds because they don't require extensive research or managerial input.
- They're designed to follow the market or index they're linked to and cannot outperform it.
- Structure: Tracker funds can be structured as unit trusts, OEICs (Open-Ended Investment Companies), or ETFs.
Types of Tracker Funds:
- Unit Trusts & OEICs: Valued once a day based on the fund's underlying assets, these offer portfolios in various asset classes like shares, bonds, property, commodities, or mixed assets.
- Exchange Traded Funds (ETFs): Bought and sold on the stock exchange throughout the day, similar to shares. They track diverse areas of investing, including niche industry benchmarks apart from major markets like the FTSE 100 or major US indices.
Choosing the Right Tracker Fund:
- Considerations:
- Assess the advantages and disadvantages of each type (ETFs, unit trusts, OEICs) before investing.
- Decide based on preferences such as cost, flexibility, and asset class diversification.
- Risk: Understand that all tracker funds involve risk, and their value can decrease, leading to returns less than the initial investment.
Tax Considerations:
- Many tracker funds and ETFs can be held in an Individual Savings Account (ISA), offering tax benefits on income and capital gains. However, the favorable tax treatment depends on individual circ*mstances and can be subject to change.
Conclusion:
- Emphasizes the importance of understanding the risks involved in investing, regardless of the type of tracker fund chosen.
- Offers additional information about investment accounts, diversification through low-cost options, and the importance of expert insight without personalized investment advice.
Understanding these concepts can help individuals navigate the investment landscape more effectively and make informed decisions about their portfolios.
