A cheap and cheerful punt on the stock markets

Tracker funds, or more accurately index tracker funds, are investment flavour of the month. There is a handful of tracker investment trusts, but most trackers are unit trusts. Like all "pooled funds" they invest money for people who have neither the time nor the expertise to select shares to buy and sell themselves.

But conventional unit trusts try to pick stock to outperform the index, with varying degrees of success. Tracker funds by contrast deliberately try to invest in shares that will follow as closely as possible the rise and fall of the indices which measure average market performance.

Some tracker funds do it by buying a stake in every company in the index they follow. Others use a computer to get as close as possible an approximation while actually holding a smaller range of representative shares.

Most tracker funds specialising in the UK stock market try to follow the FT All-share index, which consists of 900 individual shares, but you can choose a fund to track the FT-SE 100-share index if you prefer only blue-chip shares. US tracker funds usually track the Standard & Poor's top 500 shares, while Tokyo tracker funds tend to follow the FTA World Japan index of 483 stocks.

You can now buy tracker funds that match the performance of market sectors. The HSBC Trixie index tracker tracks the index of UK small companies. Or you can buy funds that will track composite indices like the Eurotrack 100 Index, the FTA Continental index of 533 top companies in Continental Europe, or the HSBC Tiger Tracker, which follows eight separate East Asian stock markets, Hong Kong, Singapore, Malaysia, Korea, Thailand, Taiwan, Indonesia and the Philippines. More trackers following emerging markets generally, or Latin America in particular, are in the pipeline.

You might think all this is something of a cop-out, the next best thing to selecting stocks at random with a pin. But the fact is that tracker funds are not just currently flavour of the month in the unit trust industry. They may well be flavour of the year in 1996, not least because several providers, such as Gartmore and Virgin, offer a UK tracker with no initial charges. Legal & General will not make an initial charge on its new tracker fund. HSBC, which claims a quarter of the UK market in tracker funds, plans to abolish its initial charges in the new year, and others are likely to follow.

Tracker funds are cheap to run and it is easy to follow their progress. This is because they do not need an army of expensive analysts to pick the stocks and decide which shares to buy and which to sell and when in order to maximise the performance of the fund.

They also deal less frequently. HSBC's All-share tracker fund, for example, only holds about 450 shares, which also helps to hold down the dealing costs involved.

The main skill in running a tracker fund is in drawing up a list of stocks that mirror the performance of the stock market in which the tracker invests. The computer then does the rest, telling the manager what he needs to buy and sell so that his fund mirrors both rises and falls.

Pension fund managers like trackers because they cannot underperform. Private investors like them because they can follow the performance of their fund quite easily from the movements of the appropriate indices, which are widely quoted in the financial media.

There is another good reason for investing in a tracker fund. In spite of all their expensive analysts and stock-pickers, funds which try to outperform the index have a rather poor record. In the last three years almost three-quarters of UK general unit trust funds have actually failed to beat the All-share index.

Over five and 10 years the failure rate rises to 90 per cent. This is only partly explained by the fact that real life funds deduct management charges from the value of their assets and pay commission on the shares they buy and sell, while the index excludes charges.

Many actively managed funds also specialise in sectors that will be in and out of favour at different stages of the economic cycle. But the short and long-term evidence is damning. It is very difficult to beat the All-share index. Even if charges are deducted from tracker fund performance, UK trackers still tend to beat the active funds, perhaps because they trade less actively and have fewer dealing costs than ordinary unit trusts.

In other markets the record for share selection is rather better. Almost a quarter of specialised funds outperform the US index; almost a half do better than the European, and more than half the Japanese funds do, perhaps because many Japanese shares in the index are difficult and expensive to trade in. But as far as the UK market is concerned investors wanting a good all-round return may well feel more comfortable with a tracker fund, especially if the movement to abolish initial charges becomes the norm. UK and European tracker funds also qualify for tax-free personal equity plans.

Start your day with The Independent, sign up for daily news emails
Arts and Entertainment
Wolf (Nathan McMullen), Ian (Dan Starky), The Doctor (Peter Capaldi), Clara (Jenna Coleman), Santa Claus (Nick Frost) in the Doctor Who Christmas Special (BBC/Photographer: David Venni)
tvOur review of the Doctor Who Christmas Special
peopleIt seems you can't silence Katie Hopkins, even on Christmas Day...
Arts and Entertainment
Left to right: Stanley Tucci, Sophie Grabol and Christopher Eccleston in ‘Fortitude’
tvSo Sky Atlantic arrived in Iceland to film their new and supposedly snow-bound series 'Fortitude'...
Arts and Entertainment
Kellie Bright as Linda Carter and Danny Dyer as Mick Carter

EastEnders Christmas specials are known for their shouty, over-the-top soap drama but tonight the show has done itself proud thanks to Danny Dyer.

Have you tried new the Independent Digital Edition apps?
Arts and Entertainment
Call The Midwife: Miranda Hart as Chummy
tvCall the Midwife Christmas Special
Laura Trott and Jason Kenny are preparing for the Commonwealth Games in Glasgow
Arts and Entertainment
Sir Bruce Forsyth with Tess Daly in the BBC's Strictly Come Dancing Christmas Special
tvLouis Smith wins with 'Jingle Bells' quickstep on Strictly Come Dancing's Christmas Special
Arts and Entertainment
Finacial products from our partners
Property search

Simon Read: The point of having protection insurance? The right cover can help reduce your financial concerns at a time of extreme worry

In May Nicola Groves got a massive shock. The 45-year-old mother of two was told, bluntly, that she had breast cancer. "When I heard the words, 'You do have breast cancer and you are going to lose your breast', I felt as if time stood still," she says.

Mark Dampier: Maybe boom, maybe bust, but we'll probably just muddle along

It's that time again when the media looks back over the past year and forward to the next. I am reminded of an old film, The Day the Earth Caught Fire (1961). Near the end of the film a newspaper prints two headlines – which one it uses will depend on whether the world is saved or doomed.

Sainsbury’s sank 7 per cent to 234p; Tesco fell 3.2 per cent to 180.2p ; and Morrisons dropped 5 per cent to 159.9p

Money Insider: Supermarkets: the real challenger banks

The supermarket banks have always excelled at offering simple, no nonsense products, and savings accounts is another area in which they fare well

Pat and Richard Astbury at their home in Norton Canes, Staffordshire. They have benefitted from the Community Energy Project aimed at helping council tenants with their energy bills. They have had solar panels installed.

Locals in Staffordshire to save hundreds after new council-backed project to install solar panels

The sun is shining on people who struggle to heat their homes and it’s thanks to a sense of community

Gross household debt reached a historic high of around 160 per cent of combined incomes in 2007

Simon Read: Give people struggling with debt some breathing space

Struggling people need help, understanding and forbearance, not ill-thought-out pronouncements

A person walks through the City of London during the early morning rush hour in London

Simon Read: Caught up in the scandal about leaks at the regulator

You won’t find me bashing the banks for the sake of it, but sadly they’ve deserved all the criticism that’s been sent their way in recent years

There were around 750,000 victims of mobile phone theft in England and Wales last year, according to official figures

Money alert: Stolen mobile phones

Gillian Guy, chief executive of Citizens Advice: 'The injustice of shock bills for crime victims must end. The Government must stand up for consumers and cap bills from lost or stolen phones at £50'

Indian workers boil sugarcane juice to make jaggery, a traditional cane sugar, at a jaggery plant in Muradnagar, Uttar Pradesh's Ghaziabad district

Mark Dampier: A hot investment story is taking shape as India lets the light in

Stirring the pot: the Indian Government’s reforms of labour rules offer hope of a brighter future for businesses 

An AA patrol man helping a woman whose scooter had broken down.

Bargain hunter: Whisk up those leftovers instead of just throwing them in the bin

Knight of the road, look out: you’ve got a new rival 

How to raise money for charity this Christmas

There are so many ways you can raise money - and awareness - for charity. Rob Griffin explains how easy it is to donate and reap financial rewards

Simon Read: The Chancellor has stamped on an unfair tax. But will the delight of homebuyers mean misery for others?

Were you surprised by the sudden reform of the rules for stamp duty on property purchases? I certainly was. I've been calling for ages for a change in the tax to make it more fair – and, at a stroke, George Osborne did just that on Wednesday in his Autumn Statement.

Santander, whose ads have been fronted by the Olympic gold medallist Jessica Ennis-Hill, was among the banks where there were potential pitfalls with shared licences

Best savings rates are not all they might seem

Consumers can sometimes think they are shopping around for a rewarding account when in one important aspect, writes Samantha Downes, they are not
The sunlit uplands: switching out of a final salary pension may seem like madness, but there could be cases where it makes sense

Gold-plated pensions – the key to retirement freedom?

With some people are weighing up whether they will be better off cashing in their final salary pension next spring, Samantha Downes asks the experts

Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating

By clicking 'Search' you
are agreeing to our
Terms of Use.

ES Rentals

    iJobs Job Widget
    iJobs Money & Business

    Selby Jennings: Oil Operations

    Highly Competitive: Selby Jennings: Our client, a leading European Oil trading...

    The Jenrick Group: Night Shift Operations Manager

    £43500 per annum + pension + holidays: The Jenrick Group: Night Shift Operatio...

    SThree: Trainee Recruitment Consultant - LONDON

    £20000 - £25000 per annum + OTE £40,000 + Car + Pension: SThree: SThree are a ...

    SThree: Trainee Recruitment Consultant

    £20000 - £25000 per annum + OTE £35K: SThree: We consistently strive to be the...

    Day In a Page

    Isis in Iraq: Yazidi girls killing themselves to escape rape and imprisonment by militants

    'Jilan killed herself in the bathroom. She cut her wrists and hanged herself'

    Yazidi girls killing themselves to escape rape and imprisonment
    Ed Balls interview: 'If I think about the deficit when I'm playing the piano, it all goes wrong'

    Ed Balls interview

    'If I think about the deficit when I'm playing the piano, it all goes wrong'
    He's behind you, dude!

    US stars in UK panto

    From David Hasselhoff to Jerry Hall
    Grace Dent's Christmas Quiz: What are you – a festive curmudgeon or top of the tree?

    Grace Dent's Christmas Quiz

    What are you – a festive curmudgeon or top of the tree?
    Nasa planning to build cloud cities in airships above Venus

    Nasa planning to build cloud cities in airships above Venus

    Planet’s surface is inhospitable to humans but 30 miles above it is almost perfect
    Surrounded by high-rise flats is a little house filled with Lebanon’s history - clocks, rifles, frogmen’s uniforms and colonial helmets

    Clocks, rifles, swords, frogmen’s uniforms

    Surrounded by high-rise flats is a little house filled with Lebanon’s history
    Return to Gaza: Four months on, the wounds left by Israel's bombardment have not yet healed

    Four months after the bombardment, Gaza’s wounds are yet to heal

    Kim Sengupta is reunited with a man whose plight mirrors the suffering of the Palestinian people
    Gastric surgery: Is it really the answer to the UK's obesity epidemic?

    Is gastric surgery really the answer to the UK's obesity epidemic?

    Critics argue that it’s crazy to operate on healthy people just to stop them eating
    Homeless Veterans appeal: Christmas charity auction Part 2 - now LIVE

    Homeless Veterans appeal: Christmas charity auction

    Bid on original art, or trips of a lifetime to Africa or the 'Corrie' set, and help Homeless Veterans
    Pantomime rings the changes to welcome autistic theatre-goers

    Autism-friendly theatre

    Pantomime leads the pack in quest to welcome all
    The week Hollywood got scared and had to grow up a bit

    The week Hollywood got scared and had to grow up a bit

    Sony suffered a chorus of disapproval after it withdrew 'The Interview', but it's not too late for it to take a stand, says Joan Smith
    From Widow Twankey to Mother Goose, how do the men who play panto dames get themselves ready for the performance of a lifetime?

    Panto dames: before and after

    From Widow Twankey to Mother Goose, how do the men who play panto dames get themselves ready for the performance of a lifetime?
    Thirties murder mystery novel is surprise runaway Christmas hit

    Thirties murder mystery novel is surprise runaway Christmas hit

    Booksellers say readers are turning away from dark modern thrillers and back to the golden age of crime writing
    Anne-Marie Huby: 'Charities deserve the best,' says founder of JustGiving

    Anne-Marie Huby: 'Charities deserve the best'

    Ten million of us have used the JustGiving website to donate to good causes. Its co-founder says that being dynamic is as important as being kind
    The botanist who hunts for giant trees at Kew Gardens

    The man who hunts giants

    A Kew Gardens botanist has found 25 new large tree species - and he's sure there are more out there