Trackers

If trackers are cheap they are ideal for first-time investors. But only if they track something sensible.

What are they?

'Tracker' is the word given to a particular style of pooled investment. It is not a type of investment. All pooled investments  have the potential to be trackers. The word 'tracker' refers to the investment style followed within the fund. These are also called 'passive funds'

Trackers are so called because they aim to track a particular market index. An index is a representation of a market. The most familiar in the UK is the FTSE100 (Financial Times Stock Exchange 100). This replicates the results of investing in the 100 largest shares on the London Stock Exchange (LSE), weighted by size. So the index tracks the aggregate market value of the 100 largest companies. And a 'FTSE100 Index Tracker Fund" aims to do the same.

There are literally hundreds of different indexes worldwide. And thousands of different tracker funds aiming to track them. And these funds may be structured as open-ended, closed-ended or ETFs. See Funds.

That sounds pretty dull. So why do people buy them?

Because, embarrassingly for the industry, actively managed funds (the opposite of trackers), with their high running costs, have consistently failed to beat the indexes on average. Just one example: 85% of UK funds aimed at capital growth have failed to beat the market over a 20-year period.

Trackers gain because they are cheap to run. What's the point of expensive star managers if the evidence is that they do not deliver? Trackers keep costs low by saving on fundamental analysis and ephemeral stock-picking skills. Computers take the decisions. And those cheap running costs translate into higher returns.

Tracker funds are therefore the first port of call for an investor who wants to minimise his risk with a broad exposure to a market, and are ideal for first-time investors. 

But make sure the tracker is tracking something sensible for you. Some are quite specialised. Tracking what?