economy
'Buy the haystack': how tracker funds beat searching for shares
Designed to mirror the stock market, they are an easy and cheap way to save. Here’s how to start investing in them
TL;DR
- Tracker funds passively follow financial market indices, offering diversification by investing in a broad range of assets.
- They typically have lower charges than actively managed funds because they do not require a dedicated management team.
- Historically, tracker funds have frequently outperformed actively managed funds, with fewer than 24% of active managers beating trackers over the past decade.
- Diversification is a key benefit, effectively spreading risk across all companies within an index, as famously described by Jack Bogle's 'buy the haystack' analogy.
- Trackers can be structured as Exchange-Traded Funds (ETFs) or traditional Open-Ended Investment Companies (Oeics), with ETFs offering intraday trading flexibility.
- Investment in trackers is recommended for the long term, ideally at least five years, to allow markets to recover from volatility and for returns to compound.
- Investors should carefully check charges, as ETFs are not always cheaper than equivalent mutual funds.
- Trackers can follow major indices like the FTSE 100 or S&P 500, or more niche indices related to specific sectors like wind energy or cloud computing.
- Investors should verify what a tracker fund includes to ensure alignment with personal values, as not all trackers have ethical or sustainable criteria.
- Investment can be made directly through fund providers, online platforms, or app-based banks, ideally within a tax-efficient ISA.
- The barrier to entry for ETFs is low, allowing investment to start with a single share.
- The inclusion of specific companies, like SpaceX after its IPO, in tracker funds depends on the index provider's rules and the fund's tracked index.
- Long-term performance examples show significant growth for investments in tracker funds over five and ten-year periods.