A tracker fund (sometimes also referred to as an "index fund") is a fund that aims to mirror the performance of a given index.
The Vanguard Group, which was set the precedent for index fund investing manage in excess of $7 trillion of investments globally.
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| Photo by Adeolu Eletu on Unsplash |
In the example of the famous S&P 500, a tracker fund manager might simply purchase all of the companies that are included in the index.
The fund manager is usually free to use other investments (such as cash & equivalents) so long as the performance of the fund closely matches the performance of the base index.
One downside to an index fund is that they can often leave investors overexposed to certain stocks - an example of this in the S&P 500 is the technology stocks.
The big tech stocks dominated the S&P 500 for some time which can negate a major benefit to tracker funds - the diversification.
Although you are always diversified with a tracker fund, a small group of high value stocks can dominate the index and leave investors a little bit more exposed to certain companies than they would like.
And
by investing in the US S&P 500 or the UK FTSE 100, you are exposed
to global economic growth as a lot of the revenue these companies
produce come from all over the world.
Overall tracker funds are an excellent way for individuals to take advantage of a growing economy with a reduced level of risk and can be a great place to start for the new investor.
This article is not advice and has not been prepared in accordance with legal requirements designed to promote the independence of investment research – no recommendations are given in the buying, selling or holding of any investments. Past performance is not a guide to the future. Investments rise and fall in value so investors could make a loss.