Tracker Funds and Income

andyjwill

I can see the merits of tracker funds thru lower costs but has anyone any thoughts as to whether a tracker should be used for income. Looking at trustnet the yields seems far lower on trackers than for actively managed funds.

Linton

andyjwill wrote: »

I can see the merits of tracker funds thru lower costs but has anyone any thoughts as to whether a tracker should be used for income. Looking at trustnet the yields seems far lower on trackers than for actively managed funds.

Not quite a tracker, but an ETF tracking a dividend based index has been tried - look up IUKD, its still around. I think that it is generally agreed that its performance has been pretty bad, well below most UK income funds. Over 5 years (it hasnt been running 10) it corresponds to about the 71st fund out of a 77.

The problem is that dividend yields may be high because a company is performing well and generating the income needed to pay a good dividend or because the share price has dropped following poor results. A simple tracker cant tell the difference.

Also, it would take no account of ensuring a good sector balance. So IUKD was heavily into banks just before the crash.

IUKD is a good example of why performance against benchmark is not necessarily a good criterion for a succesasful investment - IUKD has matched its benchmark very closely. Unfortunately the benchmark didnt represent a sensible investment strategy.

Nanpy

andyjwill wrote: »

I can see the merits of tracker funds thru lower costs but has anyone any thoughts as to whether a tracker should be used for income. Looking at trustnet the yields seems far lower on trackers than for actively managed funds.

My uninformed opinion, but I'd guess that a managed fund geared towards providing an income would be able to cherry pick companies that traditionally pay higher dividends - that's obviously the point. The downside is that these tend to be fairly well established companies whose growth isn't going to be amazing. There are small caps yielding high dividends, of course, but you're gambling more when investing in a small cap. Mind you, it's all a gamble these days.

Like anything you can strike a balance - if you use a tracker for income while you'll get less of an income than from a focussed fund, in theory you'll see more capital growth.

Oh and obviously, a tracker will have lower overall management charges, so you might be losing a percentage point on management fees and another percentage point on growth - kinda balances things out. But, natch, do your own research.