tracker fund

A fund which aims to achieve the same returns as a chosen share index, and which does this by investing in all the companies in the index according to a market value weighting. Mathematically, this ensures that the fund achieves its aims.

Why would anyone invest in a fund that only tries to match the index rather than beat it? Proponents of tracker funds argue that:

• most active funds try to beat the index but the vast majority of them actually underperform it
• a fund which can guarantee that it will do as well as the index may not be the most ambitious, but its results will be better than most other more ambitious funds
• because a tracker fund invests in a programmatic way, it does not need and army of analysts and researchers backing up its portfolio selection, and the costs are therefore cheaper.

Critics of tracker funds argue that they are unsuitable for investors who want superior returns. They also argue that because of their internal rules, tracker funds which track an index like the FTSE 100, always have to buy into new entrants to the index at a 'top' price, and sell shares of companies exiting the index at the bottom.