Index tracker funds are a type of ‘pooled’ or ‘collective’ investment fund.
A pooled fund collects contributions from different investors into one pot, enabling it to be managed by a professional investment management firm.
Pooled funds are often structured as entities known as an ‘open ended investment companies’, or OEICs. ‘Open-ended’ means the fund can create new units of ownership to satisfy investor demand.
Using computers, index trackers aim to copy the performance of a stock market index, such as the UK’s FTSE 100 or the S&P 500 in the US. These are referred to as ‘target indices’ or ‘benchmarks’ for the index fund in question.
As an investor in a tracker fund, you can at best expect to mimic the performance of an index. The money invested in a tracker will, over time, follow the movements of an index – both down as well as up.
Index tracking is different to ‘actively managed’ investment funds that are run by professionals who pick specific stocks in order to beat an underlying index.
Index trackers include those that track specific stock indices, those that focus on particular industries or sectors such as technology or healthcare, countries, or particular investing styles (such as environmental, social and governance).