Index Tracker - what happens to the income?

anotherdollar

This might seem like a stupid question, but can someone tell what an index tracker actually tracks? As i say, my question is a little deeper than it first sounds!

For example, does a FTSE 100 tracker aim to track the index plus the average income reinvested? It seems that alot of trackers are accumulution trackers, so surely they should actually exceed the index, because the income should boost their performance? Maybe it is better to buy an income generating index tracker rather than an accumulation tracker, because the income can be used to buy extra units rather than using the income to fill any shortfall in tracking performance?

Hopefully someone can explain?

Paul_Herring

It all depends on the type of tracker you get - there are two basic types:

1) Distribution units, where the tracker tracks its target as faithfully as possible, and you receive payments representing the dividends.

2) Accumulation units, where the tracker actually increases against its target, with the increase representing the dividends.

(Very) simplistically, if after a year your target hasn't moved from 100.00points, but has received 3% dividends the distribution tracker would still be at 100.00 points but you should have received 3% of the value back; the accumulation tracker would be at 103.00 points.

Note these are very round numbers, and neglect to take into account things like charges.

anotherdollar

Paul_Herring wrote: »

(Very) simplistically, if after a year your target hasn't moved from 100.00points, but has received 3% dividends the distribution tracker would still be at 100.00 points but you should have received 3% of the value back; the accumulation tracker would be at 103.00 points.

Thanks, so the accumulation tracker is tracking the 'index with the income reinvested' rather than the 'index assuming no income'. I was worried that an accumulation fund was tracking the index and the income was disappearing somewhere!

I assume this means that a good index tracker minimises deviations from the index, but maximises income? Or is there an official 'index with income reinvested'? So it has to track the 'index plus AVERAGE income reinvested'?

Paul_Herring

trelore wrote: »

Thanks, so the accumulation tracker is tracking the 'index with the income reinvested' rather than the 'index assuming no income'. I was worried that an accumulation fund was tracking the index and the income was disappearing somewhere!

Well in reality, some of it does - management fees, brokerage fees etc, so that the end figures taking those into account would be more like 99.95 and 102.95, but you get the idea.

I assume this means that a good index tracker minimises deviations from the index, but maximises income? Or is there an official 'index with income reinvested'? So it has to track the 'index plus AVERAGE income reinvested'?

I don't think there's an 'accumulation index,' for each index, no.
You're probably best off separately comparing
1) the distribution tracker against the index it's tracking to see how close it is, then
2) the accumulation tracker against the distribution tracker to see the increase due to income.