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Robert Stephens discusses the potential appeal of tracker funds
For small and inexperienced investors, buying units in a tracker fund could be a worthwhile option. They offer greater diversity than it may be possible to achieve through buying shares in companies, while also having relatively low annual charges. Their returns could also make them appealing to more experienced and larger investors – especially when the near-term prospects for a number of sectors are uncertain.
Many investors may wish to capitalise on the recent correction in the FTSE 350. They may feel that with risks to the UK and global economies being high, it may be possible to buy stocks at a larger discount to their perceived value. However, given the political and economic risk facing the UK and world economies, such investors may not wish to focus their capital on a relatively small number of sectors or regions.
Funds which track the FTSE 100 or FTSE 250, therefore, may be appealing at the moment. They offer exposure to a wide range of stocks, which themselves operate in a number of different segments and geographies. Although the two indices may continue to be volatile, they have track records of delivering turnarounds in the long run. Therefore, it seems plausible that they will go on to make higher highs further down the line, which may help to make them less risky than investing in specific companies or sectors.
Since the cost of a tracker fund is relatively low, it may work out as being cheaper than buying a number of shares in listed companies. Annual charges could be less than 0.2%, with similar buying and selling costs to individual stocks. For a smaller investor, tracker funds could therefore offer a lower-cost means of gaining exposure to a wide range of shares without the fees associated with an active fund. Given that commission charges could make up a relatively large percentage of each transaction’s value for smaller investors, this could be a crucial factor.
Although tracking risk means that a tracker fund is unlikely to perfectly follow an index’s performance, over the long run it is likely to be relatively similar in many cases. Since the FTSE 250 has generated a total annualised return of over 7% in the last five years, and a total annualised return of over 14% in the last ten years, it could offer stronger performance than a number of sectors in future years. Therefore, a tracker fund may be of interest to larger and more experienced investors who do not wish to focus on specific sectors at the moment.
Of course, a tracker fund is a relatively simple means of gaining exposure to the stock market. It may be the case that investors start off with a tracker fund and then gradually move on to owning shares as they become more experienced. However, with returns that in some cases may be relatively impressive, tracker funds could prove to be worthwhile holdings for a range of investors in the long run.