Index Tracker Funds

SallyG

http://boards.fool.co.uk/bbc-money-box-podcast-on-trackers-12455602.aspx
BBC money box prog supposed to give a link to Total Return Index which shows real returns for index trackers - ie including dividends - but I can't find the link - anyone help?

sabretoothtigger

62650 + 16431 = 79081


79081/36650 = 115% gain 215% total return

RetiredInThailand

SallyG wrote: »

BBC money box prog supposed to give a link to Total Return Index which shows real returns for index trackers - ie including dividends - but I can't find the link - anyone help?

http://www.bloomberg.com/quote/TUKXG:IND

One of the most irritating items I have ever heard on Moneybox. They spent 10 minutes explaining how some trackers were a lot better than others, but gave no indication whatsoever as to which were best (or worst), or how to find out.

And then they hide that link where it's really hard to find.

property.advert

On trackers you really need to look at the total expense ratio because it should be very low.

No 1% rubbish here, well below that.

jamesd

Total expense ratio is of limited value unless it's uncommonly high, when it can be used as a quick filter to eliminate obvious bad deals. Lower TER may tend to be the synthetic trackers, which have higher risks than the ones that really hold the underlying investments.

What matters more is the total return, which is reported after all costs have been paid, except in the case of investments that have initial charges and quote bid to bid prices ignoring that. Higher TER plus gains from stock lending could result in higher total return, though at higher risk because of the stock lending. A higher TER could also mean bore transactions to better follow an index or to do things like trying to avoid being played by active fund managers when a share enters or leaves the index. For non-UK trackers the costs could include currency hedging, which would be good if you wanted that.

Total return takes care of all of that and tells you what you need to know, your end result, if combined with a check of volatility to see the effect of any stock lending or other activities on that compared to the index. And consideration of whether it's a real or synthetic tracker.

bigadaj

I've never really understood stock lending though; yes you get an upfront fee but isn't it generally lent out to promote shorting, so the lender is actually promoting a third party to reduce the value of the holding at the end of the day.

gadgetmind

Shorting is one of those things that doesn't work all the time, and even when it does, it's a short term (sorry!) effect.

BTW, here is the FTSE versus the FTSE Total Return on a few dates.Those dividends make a massive difference!

Dec20 1999, FTSE 100=6930, FTSE 100 TR=3141
Jan30 2006, FTSE 100=5780, FTSE 100 TR=3141
Aug17 2012, FTSE 100=5852, FTSE 100 TR=4077
Dec19 2012, FTSE 100=5972, FTSE 100 TR=4198

I guess I ought to find some up-to-date numbers for the end of this table.

jamesd

Yes, stock lending is normally for shorting. There's a short term negative effect on whatever is being shorted but for a tracker that would be a small part of the total fund and the fee gain would be expected to be more than enough to cover any short term cost, while the money is invested for the long term, when temporary shorting wouldn't matter at all.

The main issues with stock lending are whether the consumers get the profits and what it does to the risk level and amount of active management. stock lending is inherently active management so a tracker doing any significant amount of it isn't really a passive investment. Not being purely passive generally doesn't matter but might for absolute purists.

koru

jamesd wrote: »

What matters more is the total return, which is reported after all costs have been paid, except in the case of investments that have initial charges and quote bid to bid prices ignoring that. Higher TER plus gains from stock lending could result in higher total return, though at higher risk because of the stock lending. A higher TER could also mean bore transactions to better follow an index or to do things like trying to avoid being played by active fund managers when a share enters or leaves the index. For non-UK trackers the costs could include currency hedging, which would be good if you wanted that.

Total return takes care of all of that and tells you what you need to know, your end result, if combined with a check of volatility to see the effect of any stock lending or other activities on that compared to the index. And consideration of whether it's a real or synthetic tracker.

The effect of most of these issues can be seen in the systematic tracking error (the extent to which the fund underperforms the index that it is tracking). Some of these issues will have the result that the fund performance fluctuates randomly, better or worse than the index, but many of them will be a constant drag on performance. In some cases, this drag can be as high as 0.7% per year. Discussed further here: http://monevator.com/switch-to-cheaper-index-funds/

Vanguard comes out very well in this respect.

sabretoothtigger

the lender is actually promoting a third party to reduce the value of the holding at the end of the day

The value of a company doesnt often depend on its stock price.

Alex Salmond might disagree but shorting is just the supply of shares which later have to be bought back, the net effect is zero

I think it was 20% of Weir was short sold this year. There was nothing wrong with business though, I bought the shorters stock at 15, it went to 20

[20 times normal levels was 'promoted' to be sold, no harm done]