‘Buy the haystack’: how tracker funds beat searching for shares
Designed to mirror the stock market, they are an easy and cheap way to save. Here’s how to start investing in themTracker funds have been around for about half a century, providing
By The Guardian
Buy the haystack: how tracker funds beat searching for shares
Tracker funds offer a straightforward, low-cost way to invest by mirroring the performance of a stock market index rather than attempting to pick individual winning shares. Designed to follow the fortunes of a given financial market, such as the FTSE 100 or the S&P 500, these funds buy shares in each company within that index or a large proportion of them, ensuring investors capture the market’s overall movement without needing a management team to make difficult decisions.
The concept of tracker funds has been in place for roughly half a century, providing access to a broad range of assets while eliminating the risks associated with active stock picking. Because they do not require a team of analysts to constantly evaluate companies, tracker funds generally come with significantly lower charges than actively managed funds, making them an attractive option for long-term savers.
If you hold a workplace pension, you are likely already invested in a tracker fund without realising it, as these are the default choice for many pension schemes due to their efficiency and cost-effectiveness. For those looking to start investing independently, financial advisers frequently direct clients toward tracker funds as a reliable entry point into the market.
To invest in a tracker fund, you simply open an account with a platform or broker that offers access to index funds or exchange-traded funds (ETFs). These platforms allow you to purchase shares in a fund that tracks a specific benchmark, such as the MSCI World index for global exposure or the Nasdaq for a technology-heavy approach.
The process is straightforward: you select the index you wish to track, and the fund automatically adjusts its holdings to match that index’s performance. One of the key advantages of tracker funds is their simplicity.
Instead of trying to beat the market through complex equity research, which often fails to generate excess returns compared to holding a broad market tracker, investors simply follow the index as closely as possible. This passive approach means that even if a company enters a major index like the S&P 500, the tracker funds holding that index will automatically buy its shares, ensuring the fund remains aligned with the benchmark.
Tracker funds are available for most global markets, but for those seeking to capture all the world’s major stock markets in one investment, a global index tracker fund following a broad benchmark like the MSCI World index is often recommended. These funds include companies from across the developed world, offering a diversified portfolio that reduces the risk of individual company failures.
The cost efficiency of tracker funds is particularly evident in the case of ETFs, which typically have a narrow range between buying and selling prices, further minimising transaction costs for investors. This makes them an ideal choice for both new and experienced investors who want to build wealth over time without paying high fees for active management.
While some investors may prefer to pick individual stocks alongside their index fund holdings, research suggests that most people would be better off long-term by sticking to a repeatable index fund-based strategy. Even when equity research is conducted, it often fails to outperform the returns generated by a broad market tracker fund.
In summary, tracker funds provide an easy, cheap, and effective way to save by mirroring the stock market. By following the performance of a specific index, they eliminate the need for active management and reduce costs, making them a practical choice for anyone looking to invest in the financial markets without the stress of picking individual shares.
Whether you are starting with a workplace pension or opening a new investment account, a tracker fund offers a reliable path to building long-term wealth.