What Is a Tracker Fund?
Let me explain what a tracker fund is: it's essentially an index fund that follows a broad market index or just a part of it. You might hear them called index funds, and they're built to give you exposure to a whole index without high costs. These funds aim to copy the holdings and performance of a specific index, often set up as ETFs or other investment types to achieve that tracking goal.
Key Takeaways
Tracker funds are pooled investments that track a broad market index or a segment of one, and they're commonly known as index funds. Their management revolves around tracking, so they work to mirror the market index's performance. You can find passively managed tracker funds with customized indexes for specific sectors, segments, or themes. Thanks to market innovations, customized tracker funds now offer more targeted investments. These customized options keep costs low for you by using an index replication strategy, which helps reduce overall expenses.
How a Tracker Fund Works
The name 'tracker fund' comes from the tracking function at the heart of index fund management. These funds aim to replicate a market index's performance, and with market innovations, there are now far more tracker funds available for investment.
When you invest in an index fund, you're engaging in passive investing. Index funds were first created to give you a low-cost way to access many securities in a market index. The main benefit here is the lower expense ratio compared to other funds.
Common indexes for U.S. exposure include the S&P 500, Dow Jones Industrial Average, and Nasdaq Composite. You often choose traditional tracker funds because most investment managers can't consistently outperform broad market indexes.
Important Note on Units
Most tracker funds come as either income or accumulation units. With income units, you get payouts in cash, while accumulation units keep the income inside the fund for reinvestment.
Special Considerations
As markets have changed, investment companies have developed new funds and indexes to meet your demands. Now, many work with specialized providers or create their own customized indexes for passively managed funds. This has expanded what tracker funds mean today.
These passively managed funds include customized indexes for market segments, sectors, and themes. Strategies have grown beyond basic growth and value to include indexes screened for various characteristics and fundamentals.
Customized tracker funds still track a predefined index but offer you more targeted investments. They provide low costs and keep expenses down through index replication, giving you some active management benefits via screened indexes.
These funds only make major transactions when the index reconstitutes, usually once a year. They give you more options and help overcome the challenges fund managers face in beating the market.
Examples of Tracker Funds
You'll find tracker funds for almost every market index worldwide. A top one is the SPDR S&P 500 ETF (SPY), with $364 billion in assets as of June 15, 2021, and an expense ratio of 0.0945%. Its year-to-date return through May 31, 2021, was 12.55%, nearly matching the S&P 500.
Companies also create their own indexes for tracker funds. Take the Fidelity Quality Factor ETF (FQAL), which tracks Fidelity's custom U.S. Quality Factor Index. This index screens for high-quality large-cap and mid-cap stocks.
With FQAL, you get exposure to high-quality U.S. stocks at lower costs due to its index replication. As of May 31, 2021, it returned 34.2% over the last year, but it underperformed the Russell 1000's 42.52% return.
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