If you’re new to investing, the level of choice can feel overwhelming and leave you confused on where to begin. One option when you’re starting out is to use tracker funds to get exposure to lots of different investments in one go.
Casual followers of financial headlines will likely have heard of the FTSE 100 and possibly even the S&P 500. These are indices made up of the largest companies on the UK and US stock market, respectively. In the US, this includes names like Microsoft and Tesla and in the UK firms such as Marks & Spencer, Lloyds and Shell.
The returns they offer are based on how these companies’ shares perform in aggregate, with the largest ones by market value (calculated by multiplying the number of shares by the share price) having the biggest influence.
You can match the performance of these and other global indices through trackers – minus the impact of any fees. Vehicles which track an index of global companies are often particularly popular. Fidelity Index World, for example, offers exposure to the MSCI World index, a collection of more than 1,300 shares in companies from developed countries.
This is a big advantage of funds in general because it means you are getting diversification and not putting all your eggs in one basket. Whereas if you are just invested in just a handful of individual stocks you would be badly affected if something went wrong with one of those companies.
What impact do lower fees have?
One other key advantage of trackers is their annual charges tend to be lower than for funds where professionals are picking the stocks for you. That’s because you’re not paying for their expertise to try and beat the performance of the stock market – you’re just looking to match it.
While active managers can do better than the market, many actively managed funds have struggled to beat tracker funds in recent years. This means you aren’t necessarily missing out on returns just by sticking to a passive fund, according to AJ Bell research.
Importantly, the impact of lower fees can add up over time as the illustrative example in the chart shows.
Let’s say you invested £1,000 in a passive fund, which has annual charges of 0.12%, versus an active fund, which has annual charges of 0.94%. If both of these funds had a 7% annual return, the tracker fund would leave you with nearly £150 more in your pot after 10 years .
What types of tracker funds can I buy?
Tracker funds can be purchased as an ETF or as a traditional type of UCITS fund. ETFs are a special type of fund which trade on the stock exchange like an individual share. This means you know the price you are paying when you buy and the purchase is made right away.
You can also buy through a more traditional fund – Fidelity Index World being one example. This type of fund does not trade on the stock market, so its price only changes once a day. This means that you can put in your order for how much you’d like to invest, but there might be some slight movement on the price of the fund by the time your trade goes through.
Usually this is extremely minimal and doesn’t affect long-term investors. You can be charged less to trade funds than ETFs. For example, AJ Bell charges £1.50 to deal when you buy or sell a fund but £5 for an ETF (or a share) unless you are buying through the regular investment service when each transaction costs £1.50.
You can invest in ETFs or tracker funds that seek to match the returns from global or regional indices, focus on specific industries, or target investment styles like companies which pay out generous dividends. Trackers also offer access to bonds, property, and commodities such as gold. After deciding your approach, you can filter the market to find your best options.
How can you narrow down the search?
AJ Bell offers free research tools to help you sift through thousands of ETFs and tracker funds. Its ETF search system lets you set criteria such as geography, sector, charges, dividend yield, and fund size.
The table shows a list of the tracker funds and ETFs which are currently most popular with AJ Bell customers.
Tom Sieber: Content Editor
Tom Sieber is AJ Bell's Content Editor. He was previously the Editor of Shares Magazine. He has been with the business since 2012.
Tom is a regular contributor to the AJ Bell Money & Markets...
