Index tracker funds

A market index is essentially a list of investments within a stock market. For example, the FTSE 100 follows the top 100 shares listed on the London Stock Exchange. 

That means a FTSE 100 index tracker fund is invested across all 100 companies. 

Another important market index is the S&P 500, which follows 500 of the largest companies on US stock exchanges.

An active fund is actively managed by a fund manager and a team of researchers – investors will pay more for that on-hand expertise through higher fees. Their aim is to outperform the market, although it can be difficult finding a fund manager that consistently does so.

On the other hand, a tracker or passive fund can hold hundreds more investments for a much lower cost. This is because the aim is to match market performance rather than beat it.

A good tracker fund is one that most closely tracks the performance of the index, at a low cost. No tracker fund’s performance is identical to the index, so investors need to look at its tracking error percentage.

The lower the tracking error percentage, the better. The higher the percentage, the more the tracker has deviated from the stock market it follows. Costs have the most significant impact on the tracking error.

Yes, you can take income by investing in tracker funds. Tracker funds are available as either income or accumulation. With accumulation funds any income is reinvested, while with income funds you are paid income in cash.

Passive funds come in two forms: index funds and exchange traded funds (ETFs).

The main difference is that unlike index funds, ETFs are traded on the stock market, meaning their price can change throughout the day. For long-term investors, this difference is not important.