Index-tracking funds aim to replicate the performance of a particular stock market index. Rather than having a fund manager who actively selects shares for the fund, a tracker will invest in all the shares that make up a particular index. This enables investors to gain exposure to a wide variety of shares across the index and to mirror that index’s performance.
One of the most popular indices used by tracker funds is the FTSE 100 – the Footsie. They offer a degree of comfort for novice and first-time investors because the Footsie consists of shares in companies which are household names and are unlikely to suddenly collapse – although there is no guarantee that this will not happen.
Most financial indices are trackable. You can track technology, European, US, Japanese and Far Eastern markets.
The drawback with trackers is that you will never outperform your chosen index or experience the spectacular returns sometimes possible with individual shares or even with specialist funds. However, tracker fund issuers claim that their funds outperform nine out of ten managed funds over periods of five years or more.
TIP: If you are looking for the cheapest form of stock market investment which offers low risk, look at UK All-Share trackers. These cover about 800 companies. It is the largest and most popular index to track for UK equity funds.