Definition
A Tracker Fund, also known as an index fund, is a type of mutual fund or exchange-traded fund designed to follow certain preset rules so that the fund can track a specified basket of underlying investments. These funds typically track a market index such as the S&P 500 or NASDAQ. The goal of a tracker fund is to provide broad market exposure, low operating expenses, and low portfolio turnover.
Phonetic
The phonetics of “Tracker Fund” is: /ˈtrækər fʌnd/
Key Takeaways
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- The Tracker Fund is a type of exchange-traded fund (ETF) that aims to replicate a specific index. It is designed to provide investors with a return that matches the performance of the index it is tracking.
- Tracker Funds are typically a cost-effective investment choice as they have lower fees compared to actively managed funds. This is because they simply follow the performance of a predetermined index and do not require active management or investment decisions.
- Lastly, Tracker Funds provide a high degree of diversification as they usually hold all (or a large amount) of the assets within the index they track. This can help to spread investment risk across a wide range of different assets.
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Importance
A Tracker Fund, also known as an Index Fund, is crucial in the world of business and finance due to its lower risk and cost-efficient nature. This type of fund is designed to follow the performance of a specific index, such as the S&P 500 or Dow Jones. As a result, it offers investors broad market exposure, low operating expenses, and low portfolio turnover, which minimizes the tax consequences for investors. Furthermore, Tracker Funds reduce the need for market timing or stock picking, making them an ideal choice for passive investors seeking long-term investment strategies. It allows investors to diversify their portfolio while keeping costs low, making it a popular choice for those seeking a steady return on investment over the long run.
Explanation
Tracker Funds, also known as index funds or passive funds, primarily serve the purpose of mirroring the performance of a specific market index. They are created with the goal of achieving returns that are almost identical to a particular index, rather than attempting to outperform it. This is accomplished by investing in the same proportion of stocks or other assets that are included in the respective index. So, the key purpose of a Tracker Fund is to provide investors with a way to gain broad exposure to the total market or specific sectors thereof, without having to purchase each individual stock or asset.Tracker Funds are widely used by investors for their low-cost, diversification benefits, and overall simplicity. They immunize investors from the risk associated with individual stocks and the need to constantly monitor their portfolio. Further, they lower transaction costs because they trade less frequently compared to actively managed portfolios. Tracker Funds have become increasingly popular in the recent years due to their transparent investment approach and the consistent returns they offer over the long-run that closely match the market index returns.
Examples
1. SPDR S&P 500 ETF: This is a popular example of a tracker fund. Launched in 1993, it aims to track the S&P 500 Index, which consists of 500 large and medium sized US companies. The fund invests in a representative sample of stocks in the S&P 500 Index to achieve its objective, the investment return and principal value of an investment will fluctuate in accordance with changes in market conditions. 2. Vanguard FTSE Developed World UCITS ETF: This is a tracker fund that seeks to track the performance of the FTSE Developed Index, which includes companies from developed economies worldwide, including the USA, UK, Japan, Canada, France, and Germany. Vanguard is famous for its advantage of low costs and this particular fund is often used by investors who prefer a set-it-and-forget-it approach.3. Hang Seng Tracker Fund (TraHK): This is a Hong Kong-based tracker fund, which is designed to track the performance of the Hang Seng Index. It was launched by the Hong Kong SAR government and is now managed by State Street Global Advisors Asia Ltd. By investing in the fund, investors can gain exposure to the blue-chip stocks of the Hong Kong stock market.
Frequently Asked Questions(FAQ)
What is a Tracker Fund?
A Tracker Fund, also known as an index fund, is a type of mutual fund or exchange-traded fund with a portfolio constructed to match or track the components of a market index.
How does a Tracker Fund work?
A Tracker Fund aims to generate the same return as a particular market index. The fund achieves this by purchasing all or a representative sample of the securities in the market index that it is imitating.
What is the purpose of a Tracker Fund?
The purpose of a Tracker Fund is to provide investors with a broad market exposure, low operating expenses, and low portfolio turnover.
What are some examples of Tracker Funds?
Some examples of Tracker Funds include the S&P 500 Index Fund, the FTSE 100 Index Fund, and the NASDAQ-100 Index Fund.
Why is the operating expense ratio usually low for Tracker Funds?
Tracker Funds typically have a low operating expense ratio because they are passively managed. Instead of hiring a team of analysts to pick and choose investments, the fund simply replicates the portfolio of a specific index.
What are the benefits of investing in a Tracker Fund?
Benefits of investing in a Tracker Fund include broad market exposure, low costs due to passive management, and returns that typically closely match the performance of the tracked index.
What are the drawbacks of investing in a Tracker Fund?
Possible drawbacks of investing in a Tracker Fund include a lack of potential for outperformance against the market, and returns that are reduced by fees, even if these are generally low.
Can a Tracker Fund lose money?
Yes. Like any investment, Tracker Funds involve risks, including the possibility that the value of the investments held by the fund could decrease, which means you could lose money.
How can I invest in a Tracker Fund?
You can invest in a Tracker Fund by purchasing shares through a brokerage account or directly through the funds’ investment company. It’s recommended to consult with a financial advisor or conduct your own research beforehand.
Related Finance Terms
- Exchange-Traded Fund (ETF)
- Index Fund
- Passive Management
- Market Capitalization
- Portfolio Diversification
Sources for More Information
