InvestmentsApr 12 2013

Take 5: Index-tracker funds

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Already well-documented as being a low-cost investment option, index-tracker funds are becoming more and more popular.

They now account for 8.7 per cent of total funds under management. But what do you need to bear in mind when selecting a tracker fund for your client? MM finds out.

1. Choose the right index. Depending on which market you want to track, getting the right index for yourself or your client is key. There are more than 50 different indices to choose from. If your client wants a UK focus with access to numerous sectors, the FTSE All Share may be their first port of call.

2. Home or abroad? Tracker funds are a great way to access parts of the market that are too difficult in active funds. Many IFAs choose to use tracker funds to access North America as they do not feel active funds do the job. Emerging markets are becoming increasingly popular with tracker fund providers.

3. Look at other vehicles. Trackers are not the only way to access the passive market. There may be an ETF more suitable, particularly if you want to track commodities. There are some areas where investors may benefit more from active management.

4. Watch out for tracking error. Tracking error is the measure of how closely the fund matches the performance of the specific index it tracks and should be kept in mind when selecting the right fund. It effectively shows the deviation from the market in performance of a fund.

5. Check the cost. A tracker fund’s total expense ratio (TER) may have a significant impact on fund performance. Look at the fund’s performance over a set period of time to check if it has significantly underperformed the market. Remember that a tracker fund does not set out to beat the market, just track it.

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