Tracker funds are investment vehicles that invest in a specific market segment. A tracker fund may also be variously called an index fund or an index tracker fund. Index tracker funds are intended to follow the performance of a particular market index; this is done by investing in all or a representative selection of the shares in the relevant market sector.
A mutual fund tracker is a type of tracker fund which invests in specific types of securities like bonds, stocks, and other money market assets. A mutual funds tracker has the advantage of allowing investors with a relatively small amount of capital to invest in these important assets in a diversified fashion that might not otherwise be possible without incurring highly expensive trading fees. This is also the case for another type of tracker, the hedge fund tracker, which uses advanced approaches like long positions, short positions, and other forms of financial leverage.
One of the reasons that tracker funds tend to be popular, with both small and large investors, is that they provide an investment vehicle that does not rely on active management. In other words, they do not have a team of financial experts, known as fund managers, who pick individual stocks and shares. Fund managers typically aim to out perform the overall stock market by investing in individual companies which they expect to perform better than the stock market as a whole or a particular index of the stock market. In reality, however, managed funds often perform less well than the wider stock market. This is sometimes considered an important selling point for tracker funds, as it is often claimed that most active fund managers hardly ever outperform the stock market, although not all advisers believe this to be the case.
Tracker funds, on the other hand, do not aim to outperform the stock market, or the index of the stock market which they are tracking, but simply to perform equally well. This is usually achieved by investing in every share in the market or market sector, or alternatively by investing in a representative selection of those shares. The main advantage of this approach is often considered to be the lower cost of managing the investment. Fund managers tend to be expensive experts, and the effort involved in researching a large number of companies and keeping track of and predicting their future performance often contributes to a high ongoing cost of investing in managed funds.
