What do you think of tracker funds?

sugarfree

Good morning.

To pick up on a point raised in another thread (Is this a viable plan?), what are your views on tracker funds as an option for someone like myself who basically wants a "buy-and-forget" investment product?

I want to invest about £200 a month over the next 20 years or so. I don't intend to touch the money before then, and I don't want to have to monitor the investment.

I am considering either the HSBC FTSE All-share tracker. Any thoughts on this? I've been told by another poster than trackers are "out of fashion" but surely they're quite a good, low-cost, low-hassle option?

Any advice greatly appreciated.

ReportInvestor

I think they have their place as part of a core portfolio. You may have read TMFMaynard's thread from the Fool which backs them for long term first time or "buy and forget" investors like yourself.

I have one in my pension fund. When I last looked Fidelity had a very low cost option. In a low return investment environment (cue arguements about last year ) low costs are an investor's friend .

dh will express strong doubts. He argues that an adviser can, for slightly higher charges, pick superior performing funds and keep your portfolio under regular review.

There is also an argument about how imbalanced and therefore "risky" they are. I.e. the FTSE index (100 or 350 or All Share) is heavily weighted in oils, banks and drug companies.

A 250 tracker would have done better recently, and maybe active managers have outperformed the other trackers by simply investing in this growing sector.

If the bigger stocks come back into the frame, then it will be harder for active managers to outperform trackers IMHO.

The anti-tracker brigade will counter by saying that the 250 example just illustrates the limiting constraints trackers are under.

You could also look at trackers of overseas indices, but the FTSE has plenty of companies that get their earnings overseas as well.

Then there is the argument that all the real action is in the developing world, that many tracker funds don't cover. (But a counter argument that emerging markets may be looking toppy.)

And finally there is an argument that trackers allegedly do better in a rising market than a falling one. Where are we over the next five years? Wouldn't we all like to know :rotfl: .

cheerfulcat

Hello, sugarfree,

I am a fan of trackers for those who want cheap and simple exposure to the markets, and who are intending to invest regularly. 80% of managed funds fail to outperform the index; unless you are prepared to do a fair bit of research, trackers are a cheaper way to get a similar result.

You could consider ETFs, which track various indices but are in fact shares, not funds, so they can be traded throughout the day ( funds are priced once a day ). You can read more here.

EdInvestor

There is a new UK I-share tracker now which focuses on dividend yield. It seems to me that if you split your money half each between this I share and the FTSE100 one, you might knock out quite a lot of the risk of the conventional tracker from the concentration on financials and resources, while also adding in the higher yield and the defensive aspects of income shares for bad times.

What do you think CC?

The new tracker has aspects of an HYP, though it is doesn't have the HYP's risk protection from diversification, etc.

The current top 10 holdings of the FTSE100 I share are quite amusing BTW:

BP 8.34%
HSBC 7.33%
GlaxoSmithKline 5.97%
Vodafone 5.11%
Royal Dutch Shell ‘A’ 4.90%
Royal Bank of Scotland 3.88%
Royal Dutch Shell ‘B’ 3.59%
AstraZeneca 3.13%
Barclays 2.76%
HBOS 2.66%


So that's where 48% of tracker money goes 17% each into oil and banks. What happens if the oil companies and the banks don't make any money that year?

Nor do you.

cheerfulcat

EdInvestor wrote:

There is a new UK I-share tracker now which focuses on dividend yield. It seems to me that if you split your money half each between this I share and the FTSE100 one, you might knock out quite a lot of the risk of the conventional tracker from the concentration on financials and resources, while also adding in the higher yield and the defensive aspects of income shares for bad times.

What do you think CC?

I would be inclined, as it is a long-term plan, to pick four or five of the ishares ( ETFs ), for diversity. There are so many available, you can cover almost any sector/market. With the more exotic ones there is a currency risk, of course ( they are US domiciled ) but even the limited range offered by Squaregain is quite impressive in its scope.

But if what is required is a simple FTSE tracker then yes, I agree; the high-yield ETF combined with either the FTSE 100 and the 250 ETF, or with an All Share tracker UT.

al_yrpal

sugarfree wrote:

Good morning.

What are your views on tracker funds as an option for someone like myself who basically wants a "buy-and-forget" investment product?

:eek: There is no such thing! :eek: Buy and forget investment is a recipe for disaster. Trackers are great when the market is rising, but pants when the market is falling (2001-3).

Choose a top performing Fund of Funds instead and get a far better return, better protection from slumps, and probably excellent gains from a worldwide investment spread including fast growing emerging economies, rather than the meagre and somewhat erratic performance of Backwater Bighty.

AND, keep an eye on it.

cheerfulcat

You obviously haven't read your Buffet. If you are a net purchaser of shares, it is in your interests for share prices to be low. The OP specifically mentioned regular investments; these would have allowed the purchase of many more shares in an ETF at an attractive price at that time .

Buy and forget is a perfectly legitimate investment strategy with trackers, as long as there are regular investments.

It is perhaps worth pointing out here that the best returns depend not on choice of investment but on reinvestment of dividends.

hobbesandco

CC, I couldn't have said it better myself. Totally agree. There's nothing wrong with buy and forget. In fact I would say it's even better because constant reviewing means your portfolio is at the mercy of your emotions which is what most people do. Then they end up buying high and selling low. As Ben Graham writes if you invest on a monthly basis and someone asks if the markets are going up or down tomorrow you can answer I don't know and I don't care!

As long as you are disciplined about saving on a monthly basis and keep reinvesting your dividends (people doing this managed to make money even throughout the depression) then you are on the road to becoming a sound investor - not a spectacular, sexy one but a sound one at that. And best of all you can sleep at night!

And by the way, for those who say index trackers are old-fashioned and boring I can't help but think the more things change the more the stay the same and cries of 'it's different this time' really scare me!

dunstonh

Trackers have no downside protection which would be present in managed funds. Trackers themselves are not bad investments. They are not good investments. They can quite validly form part of any diverse portfolio. However, if you split the market between small cap, mid cap and large cap, then these all perform "best" at different times. So, a tracker focused on a large cap index would do well when large cap happened to be the best UK sector to be in. However, it would under perform midcap when that is best.

So, if you pick a tracker as a single fund solution, you run the risk of losing a lot of money over the long term just because you wanted to shave off 0.5% a year.

There are fund supermarkets that provide annual rebalancing and if you choose a portfolio of funds that match your risk profile and take the free annual rebalancing, then you can afford to leave it with little or no monitoring. It may not do as well as a portfolio getting regular reviews but it should still be fine if the sector allocation is right in the first place.

So, if you want to get trackers, make sure you balance out your mid cap, small cap and large cap.

And by the way, for those who say index trackers are old-fashioned and boring I can't help but think the more things change the more the stay the same and cries of 'it's different this time' really scare me!

Fashion investing doesnt make a tracker old fashioned. It just doesnt make them the fashion of the moment. Equity Income has been that. Trackers became fashionable when large cap was doing well and thats why many trackers were set up. Any stats covering a period when large cap was the best place to be in would see a tracker performing well. If you look at periods when small or mid cap performed well, then trackers less so. Which is why we see an increase in mid cap trackers now.

The problem with fashion investing is that you are probably going into that area after the period of better growth has already happened.

cheerfulcat

dunstonh wrote:

Trackers became fashionable when large cap was doing well and thats why many trackers were set up.

Trackers have been in existence for thirty years. That must tell you something.

sugarfree

Many thanks to all of you for the advice. Much appreciated.