BBC say it's "likely" the FTSE 100 will break 7000 in 2015 but warn on trackers

InvestInPoker

http://www.bbc.co.uk/news/business-30589031

Some (to quote an overused phrase) "cautious optimism" from the BBC here

However they also warn that not all index/tracker funds pay dividends to investors

Many experts advise the average investor to buy so-called tracker funds, as they are low risk and usually have low management charges.

These are designed to follow the performance of a particular index, like the FTSE 100.

But not all tracker funds pay dividends.

Some are "synthetic" trackers, which use derivatives to make sure investors benefit - or lose - to the same degree as the index itself.

James Maltin, the investment director at Rathbone Investment Management, says some of these do not pay dividends.

Forgive me if I am wrong but I was under the impression almost all index funds and even a lot of actively managed funds use derivatives in some way? Surely from a quality provider like Vanguard or Fidelity their index funds will be tracking the total return index and not just the base value? Even with the use of synthetics we must get the benefits of dividends somehow?

I have no idea which index funds out there "do not pay dividends"?

tigerspill

So this begs a question (another one in my learning).
If trackers track an index - e.g. the FTSE 100. Lets say the index rises from 6000 to 6600 - does this in some way include the dividend payments or does it just track the stock prices?
So if every stock price in the index didn't move at all for one year, but every company paid 2% in dividends, would the FTSE (and the index tracker fund) move up by 2%?

Rollinghome

That's an article worthy of the Daily Mail and quoting the usual vested interests.

Thrugelmir

tigerspill wrote: »

So if every stock price in the index didn't move at all for one year, but every company paid 2% in dividends, would the FTSE (and the index tracker fund) move up by 2%?

Depends on where the income is reinvested. Dividends paid out (cash) have the effect of reducing a companies value.

masonic

InvestInPoker wrote: »

Forgive me if I am wrong but I was under the impression almost all index funds and even a lot of actively managed funds use derivatives in some way? Surely from a quality provider like Vanguard or Fidelity their index funds will be tracking the total return index and not just the base value? Even with the use of synthetics we must get the benefits of dividends somehow?

I have no idea which index funds out there "do not pay dividends"?

Most use derivatives to keep the funds fully invested and reduce trading costs, even those that are "fully replicated", but if the derivatives make up only a small proportion of the fund, then it's probably immaterial. For those that make more extensive use of derivatives, then it would be evident from the tracking error if they weren't using a total return instrument - or if it wasn't (for example when tracking a market with negligible dividends) then it's also probably immaterial.

Bottom line is that any tracker that is set up so that investors miss out on some of the market returns is going to stick out like a sore thumb.

coastline

The article although not the best does show the importance of dividends over a period of time. Investing in mid sized and smaller companies can also improve returns.
The "synthetic " and "fully replicated " bits are more likely to relate to ETF's .

http://www.which.co.uk/money/savings-and-investments/guides/different-types-of-investment/understanding-tracker-funds-and-etfs/

http://www.dummies.com/how-to/content/synthetic-trackers-for-your-investment-portfolio-i.html

The two ETF's below are "physical" as far as I understand..

http://www.iii.co.uk/research/LSE:ISF

FTSE 100 which pays out dividends..

http://www.iii.co.uk/research/LSE:CUKX

FTSE 100 accumulation...

masonic

coastline wrote: »

The two ETF's below are "physical" as far as I understand..

http://www.iii.co.uk/research/LSE:ISF

FTSE 100 which pays out dividends..

http://www.iii.co.uk/research/LSE:CUKX

FTSE 100 accumulation...

The Lyxor FTSE 100 ETF (L100) is an example of a synthetic ETF that tracks the total return index. It doesn't distribute income, much like CUKX.

collingbone614

"Many experts advise the average investor to buy so-called tracker funds, as they are low risk".

I'm not sure which "experts" are stating that tracker funds are somehow lower risk. Risk comes in many different flavours and the ability to loose cash is very much present.

I say this as a newcomer to investing myself, who is taking the passive route, but there seems to be a lot of people on forums piling in, and you just hope that these people fully comprehend the level of risk they are inviting onto themselves when they buy into Vanguard LS 80, Blackrock Consensus 85, Legal & General Multi-Index 7, etc. The fact that an investment vehicle is branded as passive doesn't mean you aren't inviting serious risk towards your capital.

brasso

omnirife wrote: »

"Many experts advise the average investor to buy so-called tracker funds, as they are low risk".

I'm not sure which "experts" are stating that tracker funds are somehow lower risk. Risk comes in many different flavours and the ability to loose cash is very much present.

I say this as a newcomer to investing myself, who is taking the passive route, but there seems to be a lot of people on forums piling in, and you just hope that these people fully comprehend the level of risk they are inviting onto themselves when they buy into Vanguard LS 80, Blackrock Consensus 85, Legal & General Multi-Index 7, etc. The fact that an investment vehicle is branded as passive doesn't mean you aren't inviting serious risk towards your capital.

I think "serious risk" is an exaggeration, depending on what you're tracking, how diversified, how long your investment horizon is and how you are investing.

Tracking an oil sector index and having a 6 month timescale and investing via lump sum would have been a disastrous combination if you'd started in the middle of 2014. Tracking Russia would also have been bad through 2014.

As always, diversification is vital, so if you're tracking an entire index or have a 'fund of funds', especially if you are drip-feeding and have at least a couple of years, I think the risk is fairly small. People usually quote a minimum investment horizon of 5 or even 10 years but that's unnecessarily cautious in my experience. Which leads to...

The biggest thing is simply appetite for risk. When I first started investing I freaked out when the funds I bought (after much deliberation) suddenly dropped after a few months. I sold up, just breaking even once charges were included. I mopped my brow in relief, grateful that I had saved my money. Needless to say, looking back now, those same funds are massively up, all with 3-figure percentage rises. Compare that with the drop that occurred 2 or 3 months back, when I gleefully topped up my investments while they were cheap.

If you learn not to panic, and especially if you have the ability to drip-feed, this investing style is pretty reliable, IMO.

jimjames

masonic wrote: »

The Lyxor FTSE 100 ETF (L100) is an example of a synthetic ETF that tracks the total return index. It doesn't distribute income, much like CUKX.

But it still includes dividends.

The only ones I can think of that don't pay dividends are structured products that guarantee to pay based on FTSE level but that doesn't include the payment of any dividend over the period.

Sloppy reporting to quote that and no give any evidence, I'm not convinced any mainstream trackers actually exist that don't pay dividends.

InvestInPoker

jimjames wrote: »

The only ones I can think of that don't pay dividends are structured products that guarantee to pay based on FTSE level but that doesn't include the payment of any dividend over the period.

Sloppy reporting to quote that and no give any evidence, I'm not convinced any mainstream trackers actually exist that don't pay dividends.

I totally agree with this, the only things I could think of were the products high street banks try and sell to the uninformed?

I cant think of any proper index funds that don't include dividends either (but then again I am just a newbie)

Terrible article by the BBC.