Know these risks before investing in a tracker fund

Tracker funds and Exchange traded funds (ETFs) are some of the most popular ways to invest in stock markets, and for good reason. They're cheap, provide you with instant exposure to several stocks, and have delivered better return outcomes than most active funds across the past decade.

But like any investment choice, tracker funds are not risk free and it’s important to know what you’re signing up for when buying one.

A lot of investors put their money into tracker funds

2026 has been a particularly strong year for tracker funds, with UK investors pouring £9.7 billion into this part of the market so far. The April to June quarter set a new record for money going in, surpassing the last high set in Q3 2024, according to the Investment Association.

These funds are some of the biggest on the market, dwarfing many of the active peers when comparing assets under management (AUM).

Amongst the global sector, the 10 largest funds were all tracker funds, led by iShares Core MSCI World ETF, with just under £113 billion in AUM, according to FE Analytics.

Before you make the move into one, or even if you already have, it's a good idea to be clear on what the characteristics of these types of funds are to make sure it's the best choice for your goals.

Not protected if the market goes down

One of the big tradeoffs you have to take with tracker funds is that, by nature, they aren’t constructed to provide protection from the market in the case of a selloff.

Index-tracking funds take a blanket approach to the market, which means they aim to mimic the makeup of the underlying benchmark by investing in a bit of every company.

Learn about the key difference between the most popular global tracker funds in our recent article.

They follow the ebb and flow of whichever market they track rather than trying to outperform it, like an active fund would.

Taking the iShares Core MSCI World ETF, for example, which follows the MSCI World index, the fund seeks to replicate the index so when the index rallies, the fund will too. But the risk comes when eventual market volatility appears and the ETF declines in line with the index.

Periods such as the pandemic, Russia’s invasion of Ukraine and ‘Liberation Day’ all sparked massive swings in markets. If your ETF tracked those markets, it’d be taken on a ride as well.

Investing in stocks

ETFs often invest in stocks, which tend to experience more volatility than bonds or cash.

Fixed income does now have a growing ETF market as investors continue to find the most cost-effective means to invest, and providers try to offer more products.

The iShares Core MSCI World ETF invests only in stocks, which is expected, but worth checking against your own risk profile and investment goals to see if it's complimentary to them.

Thinking all ETFs are the same

This is less of a risk with ETF products themselves, and more a risk that investors assume that all ETFs are the same. In reality, they require a fair bit of research before you buy them.

AJ Bell previously went under the bonnet of the two most popular global tracker funds among its DIY investors: Fidelity Index World vs the HSBC FTSE All-World Index.

Both of them handle billions of pounds for investors, and from just a glance, someone may assume that they’re pretty much the same. And while they do have a lot in common in terms of what they invest in and where, and hold a lot of the same stocks as a result, there are significant differences.

For starters, they both track different benchmarks. The Fidelity fund follows the MSCI World index, while the HSBC fund follows its namesake FTSE All World index.

These indices provide a different type of global equity exposure because the Fidelity fund excludes companies in Taiwan and South Korea, while the FTSE All World includes them.

If an investor was keen to have some of their investments in companies like TSMC or Samsung, they’d be missing out if they bought the Fidelity fund. Equally, someone who has watched the big swings in South Korean markets over the past few weeks and bought the HSBC fund while hoping to stay out of that trade they would have unintentionally gained portfolio exposure to that market.

Concentration risk

Because the nature of a ‘standard’ tracker fund is to replicate the benchmark it follows, that also means they can become as concentrated as the market.

While the MSCI World is comprised of over 1,000 companies, almost 30% of the performance is down to just 10 stocks.

These are the 10 biggest ones in its investment universe, which include the likes of Nvidia, Apple and Microsoft.