Reviewed by Aug 27, 2020| Updated on
What is a Tracker Fund?
A tracker fund is an index fund tracking a broad market index, or a segment of it. Also known as index funds, tracker funds are designed to offer exposure to a whole index at low cost to investors. Such funds strive to replicate the assets and results of a specified index, designed as ETFs or alternative investments to meet the goal of monitoring the fund.
How Does the Tracker Fund Work?
The term ‘tracker fund’ evolved from the tracking function which drives the management of index funds. Tracker funds are looking to replicate market index performance. Market innovation has significantly expanded the number of tracker funds available in the market.
Investing in an index fund represents a form of passive investment. Index funds were initially introduced to provide investors with a low-cost investment vehicle which allows exposure to the many securities included in a market index. The primary benefit of such a policy is the lower spending ratio on an index fund.
The bulk of tracker funds are either unit of profits or of accumulation. Income is paid out as cash to fund investors in the former case. In the latter case, the money is preserved for reinvestment within the fund.
When markets evolved over time, investment firms tried to meet the exact criteria by creating new and innovative funds and indices to attract investors. As a result, many investment firms are now partnering with specialist index providers or developing their own custom indexes for passively managed funds to use. With this transformation of the market, a much broader definition now encompasses tracker funds.
Passively managed tracker funds now include the personalised market segment, industry, and theme indexes. Customised tracker funds are still trying to follow a predefined market index, but they provide much more focused investment.