Are Index tracker funds "managed"

CreditCardChris

Buy managed I mean does the manager still try to pick stocks, reshuffle money between stocks and stuff?

How does the manager of an index tracker fund decide what stocks to invest new money into? Also when using a compound interest calculator, do I set the compound rate to daily, monthly, yearly etc? And is the compound interest based on dividends or actual stock market percentage growth?

Linton

In theory, and by definition, the manager of an index tracker fund has no choice as to which shares to buy or what to do with the money. The shares the manager must hold and their proportions are defined by an index such as the FTSE100 that contains all companies that satisy the requirements of the index.


In practice it may not be possible for an index fund manager to hold all the shares in the index. For example some of the holdings may be so small that it is not worth the effort, or so rarely traded that they cannot be bought in sufficiently large quantities. For some indexes, eg those that follow commodities, it may be impractical for the manager to hold the underlying assets. In such circumstances the manager may only hold a subset of the index or may contract another financial institution to guarantee the value of all or part of the fund by financial wizardry. The latter option, known as "synthetic" replication is considered somewhat risky in that the fund's value is dependent on this external institution doing its job and remaining solvent.


The rate of return of the index fund is given by the rates of return of the underlying assets and should closely follow those of the index on which it is based. The values of index funds are determined daily, or continually in the case of ETFs. An index fund, like any other fund, will either pay out the dividends it receives or will reinvest them internally. How you calculate the rate of return is up to you.

CreditCardChris

Linton wrote: »

In theory, and by definition, the manager of an index tracker fund has no choice as to which shares to buy or what to do with the money. The shares the manager must hold and their proportions are defined by an index such as the FTSE100 that contains all companies that satisy the requirements of the index.


In practice it may not be possible for an index fund manager to hold all the shares in the index. For example some of the holdings may be so small that it is not worth the effort, or so rarely traded that they cannot be bought in sufficiently large quantities. For some indexes, eg those that follow commodities, it may be impractical for the manager to hold the underlying assets. In such circumstances the manager may only hold a subset of the index or may contract another financial institution to guarantee the value of all or part of the fund by financial wizardry. The latter option, known as "synthetic" replication is considered somewhat risky in that the fund's value is dependent on this external institution doing its job and remaining solvent.


The rate of return of the index fund is given by the rates of return of the underlying assets and should closely follow those of the index on which it is based. The values of index funds are determined daily, or continually in the case of ETFs. An index fund, like any other fund, will either pay out the dividends it receives or will reinvest them internally. How you calculate the rate of return is up to you.

Thanks.

How do I know if a fund is an ETF? For example this one https://www.hl.co.uk/funds/fund-discounts,-prices--and--factsheets/search-results/h/hsbc-american-index-class-c-accumulation

dividendhero

I believe that passive fund managers also buy into or sell shares that are very likely to be moved in or out of the index they follow.

If they didn't do this, they'd lose out as there'd be a stack of trades on the day the index was reshuffled

Linton

CreditCardChris wrote: »

Thanks.

How do I know if a fund is an ETF? For example this one https://www.hl.co.uk/funds/fund-discounts,-prices--and--factsheets/search-results/h/hsbc-american-index-class-c-accumulation

That is a standard fund (OIEC/UT). ETFs are funds that are traded in the same way as shares but their price is kept at the appropriate level. They are a different type of investment alongside OIEC/UTs and Investment Trusts.


You can get a full list from https://www.trustnet.com if you select "Exchange Traded Funds" from the "Fund Universe" list and then "Search". Note that ETFs are considered less suitable for the novice investor as you need to know precisely what you are looking for as some are very specialised products. Unlike normal funds they have no FSCS protection.

MarkCarnage

I believe that passive fund managers also buy into or sell shares that are very likely to be moved in or out of the index they follow.

Yes, that's fairly common practice.

Some index trackers employ sampling methodologies where the relevant index has a very large number of stocks, some of which may be illiquid, and they will hold a representative sample of part of the index constituents.