What is Tracker Fund?

Full Definition

A tracker fund (also known as an index fund or, if listed and traded on a stock exchange, an exchange-traded fund or ETF) is a passively managed investment fund designed simply to replicate the performance of a specific market index, such as the FTSE 100, FTSE All-Share or S&P 500, by holding the same (or a representative sample of the same) constituent shares in broadly the same proportions as the index itself, rather than employing a fund manager to actively research and select individual investments in an attempt to beat the market. Because a tracker fund does not need active research teams making individual buy and sell decisions, its ongoing charges figure is typically much lower than an actively managed fund investing in the same market -- often a fraction of a percent a year compared with 0.75% to 1.5% or more for many active funds -- which matters significantly over the long term, since fund charges compound and erode returns in the same way investment growth does. Evidence from long-running independent studies has repeatedly shown that the majority of actively managed funds fail to consistently beat their benchmark index after fees over periods of ten years or more, which has driven a substantial and ongoing shift of UK investor money from actively managed funds into low-cost tracker funds and ETFs held within tax wrappers such as a Stocks and Shares ISA or SIPP. A tracker fund will, by design, also fully participate in any fall in its underlying index, since it does not have the flexibility an active manager has to reduce exposure to specific shares or sectors they consider overvalued or risky ahead of a downturn.

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