What is a 'Tracker Fund'

A tracker fund is an index fund that tracks a broad market index or a segment thereof. Tracker funds are also known as index funds. These funds seek to replicate the holdings and performance of a designated index. Tracker funds are designed to offer investors exposure to an entire index at a low cost. Tracker funds typically buy the individual securities in the index they seek to replicate. Tracker funds can also be constructed of ETFs or alternative investments to meet the fund’s tracking objective.

BREAKING DOWN 'Tracker Fund'

The term "tracker fund" has evolved from the tracking function that drives index fund management. Tracker funds seek to replicate the performance of a market index. Market innovation has significantly broadened the number of tracker funds available in the investable market.

Investing in an index fund is a form of passive investing. Initially index funds were introduced to provide investors a low cost investment vehicle that allows for exposure to the many securities included in a market index. The primary advantage to such a strategy is the lower expense ratio on an index fund. Popular indexes for U.S. market exposure include the S&P 500, Dow Jones Industrial Average and the Nasdaq Composite. Investors often choose traditional tracker funds because a majority of investment fund managers fail to beat broad market indexes on a consistent basis.

As markets have evolved over time, investment companies have sought to meet comprehensive demands by developing new and innovative funds and indexes to satisfy investors. As a result many investment companies now work with specialized index providers or create their own customized indexes to use in passively managed funds. With this market evolution, tracker funds now encompass a much broader definition.

Passively managed tracker funds now include customized indexes for market segments, sectors and themes. Tracker fund strategies have also expanded beyond traditional growth and value index strategies to include indexes screened for a wide range of characteristics and fundamentals. Customized tracker funds still seek to track a predefined market index but they provide for much more targeted investment. Offering relatively low costs for investors they are able to keep overall fund expenses lower by continuing to use an index replication strategy while getting many of the benefits of active fund management through screened indexes. These funds only need to make significant fund transactions when a customized index reconstitutes which is typically once a year. Customized tracker funds offer investors a broader range of options while also alleviating many of the significant challenges for fund managers in beating the market.

Tracker Fund Investments

Investors will find tracker funds available for nearly every market index in the world. One of the most popular tracker funds is the SPDR S&P 500 ETF (SPY). The Fund has $249.2 billion in assets under management. It has an expense ratio of 0.0945%. As of November 21, 2017, it had average daily volume of 62.04 million shares. Year-to-date return for the SPDR S&P 500 ETF through November 21, 2017 closely matched the return of the S&P 500 at 16.31%. (See also: The 4 Best S&P 500 Index Funds)

Alternatively, many companies develop their own indexes with specified criteria for tracker funds. The Fidelity Quality Factor ETF (FQAL) is an example. The Fund tracks a customized index created by Fidelity called the Fidelity U.S. Quality Factor Index. The Fidelity Quality Factor ETF seeks to replicate the holdings and performance of the Fidelity U.S. Quality Factor Index. The Index utilizes a screening methodology to identify high quality large cap and mid cap stocks. Investors get exposure to high quality U.S. large cap and mid cap stocks while the Fund requires lower costs due to its index replication construction. As of November 21, 2017, the Fidelity Quality Factor ETF was closely tracking the return of its Index benchmark at 17.51%. Meanwhile, the Fund is outperforming the broad U.S. large and mid cap universe represented by the Russell 1000 which has a year-to-date return of 16.11%.

RELATED TERMS
  1. Index Fund

    An index fund is a portfolio of stocks or bonds that is designed ...
  2. Fundamentally Weighted Index

    A fundamentally weighted index is a type of equity index in which ...
  3. Total Stock Fund

    A total stock fund is a mutual fund or exchange-traded fund that ...
  4. Basket

    A basket is a unit of at least 15 stocks that are used in program ...
  5. Stock Exchange-Traded Fund (ETF)

    A stock exchange-traded fund (ETF) is a security that tracks ...
  6. Structured Funds

    Structured funds are a type of fund that combines both equity ...
Related Articles
  1. Investing

    What Are Factor Model ETFs?

    Given that stock picking is not generally effective, trackers that simply follow an index have become very popular. However, trackers have their disadvantages, too, so hybrid models between the ...
  2. Investing

    The Hidden Differences Between Index Funds

    These funds don't all match index returns. Find out how to avoid costly surprises.
  3. Financial Advisor

    The 4 Best U.S. Equity Index Mutual Funds

    Find out which four index mutual funds are among the best U.S. equities index mutual funds for core holdings in your investment portfolio.
  4. Investing

    ETF Tracking Errors: Protect Your Returns

    Tracking errors tend to be small, but they can still adversely affect your returns. Learn how to protect against them.
  5. Investing

    How to Use Index Funds to Diversify Your Portfolio

    Index funds can act as quality diversification tools.
  6. Investing

    Fidelity Is Selling More Index Funds

    Learn about Fidelity Investments' presence in the index fund marketplace as of 2016 and discover what the company is doing to increase its market share.
  7. Investing

    Why Index Fund Investing Works

    Over time, index fund investing gained traction and ultimately reshaped the industry. Today, these once obscure funds comprise more than 22 percent of equity mutual fund assets, according to ...
  8. Insights

    This Bull Market Is Supported by the Index Funds Investment

    The massive growth of index funds has been supporting the bull market and could lead to a steeper correction when it happens.
  9. Investing

    4 Reasons Why Fund Managers Prefer Individual Stocks (BRK-A, VOO)

    Learn about some of the reasons why fund managers prefer trading in individual stocks over index funds, despite their overall cost savings.
RELATED FAQS
  1. How can I buy an S&P 500 fund?

    Looking for access to the S&P 500? Learn how to access an S&P 500 index fund or ETF. Read Answer >>
  2. How can I calculate the tracking error of an ETF or indexed mutual fund?

    Understand what tracking error for index ETFs or mutual funds is, and how to calculate it. Learn about the difference it ... Read Answer >>
Hot Definitions
  1. Socially Responsible Investment - SRI

    Socially responsible investing looks for investments that are considered socially conscious because of the nature of the ...
  2. Business Cycle

    The business cycle describes the rise and fall in production output of goods and services in an economy. Business cycles ...
  3. Futures Contract

    An agreement to buy or sell the underlying commodity or asset at a specific price at a future date.
  4. Yield Curve

    A yield curve is a line that plots the interest rates, at a set point in time, of bonds having equal credit quality, but ...
  5. Portfolio

    A portfolio is a grouping of financial assets such as stocks, bonds and cash equivalents, also their mutual, exchange-traded ...
  6. Gross Profit

    Gross profit is the profit a company makes after deducting the costs of making and selling its products, or the costs of ...
Trading Center