IMA: record investment in tracker funds in July
Demand for tracker funds hits all-time high.
More investors are pouring money into tracker funds than ever before, according to new figures from the UK’s Investment Management Association (IMA).
It revealed net retail sales of tracker funds reached £532 million in July, the highest level since the IMA’s records began in January 1992.
Tracker funds now make up 10.2% (£83 billion) of the total funds under management in the UK, up from 9.4% in July 2013.
But what exactly is a tracker fund and why are people turning towards this type of investment?
What is a tracker fund?
Tracker funds (also known as index tracker funds or passively managed funds) are linked to the performance of a specific index, such as the FTSE 100.
They work by replicating an index rather than trying to beat it.
So should an index rise in value by 5%, your investment will do the same minus fees, charges and tracking error (this measures how closely the fund moves in line with its underlying index).
If an index your fund is tracking falls in value by 5%, your investment will follow by the same amount plus the associated costs.
For more check out our beginner’s guide to index tracker funds.
Why tracker funds are increasingly popular
Tracker funds offer a cheap and easy way to invest in the stock market, which makes them a good choice for novice investors.
Fees are kept low because tracker funds can be managed by computer. This automation bypasses the need for a costly active fund manager selecting a basket of shares for you.
There are many tracker funds which charge 0.5% or less, while actively managed funds - where a fund manager is picking exactly which investments to make - cost much more. The idea is that you're paying more in order to benefit from the fund manager's expertise, though since many fund managers don't even manage to match the index they are focusing on, that 'expertise' may be somewhat expensive.
Another boon for tracker funds is the firms which offer them are competing more on their costs.
Vanguard is the latest to slash its prices. From September it’s lowering fees across 25 funds some by as much as 50%. The new charges mean investors can now access the Vanguard FTSE UK Equity Index (which aims to replicate the performance of the FTSE UK Equity Income index) for just 0.08% down from 0.15%.
You can actually so slightly better with the Fidelity, where fees start at just 0.07%, while BlackRock, Legal & General and HSBC all have index trackers with fees of less than 0.2%.
How to invest in a tracker fund
In order to get your tracker fund portfolio, started you’ll need to pick an index.
You may want to stick with a UK market like with the FTSE 100 which lists the biggest 100 companies in the UK or the FTSE All Share which covers around 98% of UK listed companies.
Or you may prefer to try global tracker funds which replicates indices overseas. This will depend in part on your attitude to risk and your feelings about the markets or sectors you want to track.
The Investing In Funds website allows you to research past performance. But you should bear in mind past performance is no guarantee of future returns.
Once you’ve chosen the index you’ll need to compare the different tracker funds and their charges. When comparing the cost of funds it’s easiest to look at the Total Expense Ratio (TER). Though it doesn’t include all the costs, it’s the most accurate figure and easy to find.
Tracking error is another important element. This measures how closely a fund moves in line with its underlying index. This might sound strange if funds from different providers track the same index, but different funds can have different tracking strategies. Some funds buy all the companies in the underlying index while other funds buy a selection.
There are a variety of ways to invest in a tracker fund but investment platforms or fund supermarkets usually offer the cheapest route. These tend to come with platform charges, and there may also be other charges like annual management fees and exit fees to consider. Read Beginner's guide to investment platforms.
So deciding which investment platform you’re going to use is just as important as choosing your tracker funds!
More on investing:
Beginner's guide to investment platforms
Beginner’s guide to managed funds
Beginner's guide to Exchange Traded Funds
Beginner's guide to investment trusts
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