Seems obvious but how do tracker funds make any money

happyhero

Hi can somebody explain to me how you make money in tracker funds, I have read several bits on the net but they seem to leave one vital bit of info out?

I can see that if for example you took a FTSE100 one out and it it rose by say 5% up or down the tracker would follow but bearing in mind they are usually for a fixed term, the FTSE does go up and down a lot and does not seem to easily break its peak which it seems near now, I could take one out now and expect it to fall or even if I was lucky it may go up 5% but when I sell it could have dropped that 5% so how do I make any profit.

I could understand it if it tracked something that continously rose more or less but if you track something that just rollercoasters up and down how do you make any profit?

Only way I could see to make it work is to treat it like a share and try to buy it low and sell at your own convenience when its high but I keep reading everyone is buying trackers right now yet everything is up so I'm confused.

I probably have not explained properly but hopefully someone will get the gist of what I am saying.

Any info/help appreciated.

Linton

Tracker funds are never for a fixed term. You should be thinking in terms of a flexible term of at least 5 years and preferably 10.

Over those sorts of periods the indexes trackers track do go up significantly particularly if you reinvest dividends. But in the meantime you must be prepared for major fluctuations.

In my view it is poor investing to continually try to buy low and sell high over the short term, the problem being that it is impossible except with hindsight to be sure that what you think is a low or high is in fact one with sufficient accuracy. The proverb often quoted is that "it is time in the market that matters, not timing the market".

jimjames

Tracker funds are not fixed term, I think you're getting confused with another product.

Remember they also pay dividends which for the FTSE is currently around 3.5% so even if no capital growth you'll still make money and more income than savings account. Remember the capital isn't guaranteed though.

Over the long term it should still rise. Even though the peak was in 1999 you'd still be over 60% up if you held from then till now due to dividends. Unlikely you'd have invested on the highest day so more likely to be up more than that especially when it's been under 4000 in that time too.

collingbone614

My understanding is that you are meant to move the money into bonds over time, by a process called lifestyling. This moves the money you've (hopefully) made out of the tracker and into bonds. Once the money is in bonds, it's meant to be in a less volatile position than if it were in equities. Once you retire you then start drawing on the money you have built up in those bonds, at a rate you can afford.

ColdIron

happyhero wrote: »

Only way I could see to make it work is to treat it like a share

Have you asked yourself - what is the difference between a share and a FTSE tracker?

TrustyOven

happyhero wrote: »

Seems obvious but how do tracker funds make any money

Trackers make themselves money because you pay them a small percentage of your holding.

happyhero wrote: »

I could understand it if it tracked something that continously rose more or less but if you track something that just rollercoasters up and down how do you make any profit?

Because you don't assume:

• that the price per unit will always go up by the exact same amount it goes down
• that the number of times it goes up or down is fixed
• that you will only ever make one purchase of the asset in question
• that you will not use Pound Cost Averaging
• that active funds charges are lower than indexed

dale_cotterill

The simple answer to your question is DIVIDENDS

A tracker fund tracks the shares in the index, and without dividends as you say would basically be just up and down with the index.

Dividends are the income paid by companies to the shareholders which in a tracker would then be paid out to you, or reinvested into the fund depended on what type of holding you have. So your total return is far greater.

2010

dale_cotterill wrote: »

The simple answer to your question is DIVIDENDS

So your total return is far greater.

If the index you are tracking has gone down since you bought into it, even taking account of dividends, your total return is far less.

If you bought the ftse100 at today`s 6890 and it drops down to 5890 your losing money even with dividends.

In Dec 99 the Ftse100 peaked at 7000, since then it`s NEVER hit 7000 again.

masonic

2010 wrote: »

If the index you are tracking has gone down since you bought into it, even taking account of dividends, your total return is far less.

If you bought the ftse100 at today`s 6890 and it drops down to 5890 your losing money even with dividends.

Clearly that depends upon how far the index falls relative to dividends accrued during that period, but of course the index can fall much faster than dividends get paid out.

In Dec 99 the Ftse100 peaked at 7000, since then it`s NEVER hit 7000 again.

In this example, you would have made money - probably more than the net return from cash over the same period - with reinvested dividends. Unfortunately I can only find total return data for the FTSE 100 back to about 2003, so it is difficult to crunch the numbers exactly.

Of course, many do not invest a lump sum at one point in time, but invest part of their income gradually over time. Those people can take comfort from the fact that if they'd invested an amount annually from 1999 to the present day, they'd have made quite a bit more.

Nevertheless, it is a good point that the performance of the FTSE100 has been disappointing from 1999 to now. Even investing in the FTSE All-share over the same period (about 80% of which is FTSE100), would have given much better results. Most would recommend a more globally diversified approach for the same reason.

Linton

masonic wrote: »

...
In this example, you would have made money - probably more than the net return from cash over the same period - with reinvested dividends. Unfortunately I can only find total return data for the FTSE 100 back to about 2003, so it is difficult to crunch the numbers exactly.

....

Look on Trustnet. Tool/Charting will allow you to track indexes and funds, with and without reinvested dividends, over an extended time period.

jimjames

2010 wrote: »

In Dec 99 the Ftse100 peaked at 7000, since then it`s NEVER hit 7000 again.

That's true but equally it been below 4000 in 2003 and 2009 (the peak in 1999 was actually under 7000)

It seems very unlikely that anyone would invest right at a peak 15 years ago and not invest anything else in the following 15 years. Many people quote 5 and 10 year returns which would both be very positive.

Even if you did invest at the peak you'd still be 60% up including dividends so far from losing money.