Best Index Tracker Fund (2023)

81% of retail investor accounts lose money when trading CFDs with this provider.You should consider whether you understand how CFDs work and whether you can take the high risk of losing your money.

Passive funds are an important part of the global investment landscape. This is because statistics show that actively managed portfolios often underperform their benchmarks and charge higher fees than passive funds.

According to research by AJ Bell, only a third of active equity funds managed to outperform their passive alternatives in 2021. The Manager vs. Company's Machine showed that active outperformance was particularly lacking in the US, Global and Asia-Pacific regions last year.

One way to evaluate the performance of a passive mutual fund is to consider its tracking error. This reflects the extent to which a tracking fund's performance deviates from the index or other benchmark it needs to track.

Tracking error is measured as a percentage, so a tracking error of 0% indicates a perfect replica. A tracking error equal to just the fund's expenses (see below) would reflect a passive investment that is doing its job exactly as it should.

Passive funds tend to be less expensive than their actively managed counterparts.

The reason is that regardless of whether your index tracker is a full or partial replication, the fund should cost less overall than if it employed a team of active managers.

The above tracker funds include fees between 0.07% and 0.2%. Investing £1,000 in the latter would therefore cost £2, although depending on where the fund was purchased (see below) additional trading/management fees may also apply.

In contrast, the fee for an actively managed fund is typically between 0.5% and 1.5%.

There are two main types of tracker funds:exchange traded funds(ETF) that are exchange-tradable and Open-Ended Investment Company (OEIC) that are not.

ETFs are a form of passive collective investment that track entire stock indices, specific sectors, currencies or commodities. Meanwhile, OEICs cover a wider range of pooled or pooled funds, some of which are trackers.

Unlike OEICs, ETFs can be bought and sold like common stock. The decision between an ETF or an OEIC may depend on how much your brokerage charges to hold each type of product.

Any type of investment based on the stock market involves certain risks. An index fund that owns dozens, if not hundreds, of stocks is more diversified than a portfolio that only owns a handful of companies.

In the example of a stock index fund, any company would have to fail before investors lose everything. However, depending on your approach, an index fund can underperform and lose money over several years if, say, an investment sector or region falls out of favour.

This depends on the risk appetite of the individual investor. Stocks are a higher risk option as there is a risk that an individual company will underperform or, in the worst case, go out of business. However, stocks can generate higher potential returns.

In comparison, index funds offer a diversified portfolio of investor-ready assets. If a company or asset underperforms, it can be offset by another outperforming asset, meaning investors receive the average return of all assets.

However, some index funds can be riskier than individual stocks. For example, raw material prices may be highervolatilethat the prices of large cap companies in theFTSE-100 Index. The risk profile depends on the underlying assets in which index funds invest.

Also note that fees may vary between index and stock funds. Most, but not all, platforms charge a stock trading fee to buy and sell stocks and ETFs, while many charge a lower fee or no fee to buy funds.

However, holding funds may incur platform fees, whereas stocks and ETFs tend to be lower or sometimes have a fixed cap per year.

andres migueleditor