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. Index Hugger

    An index hugger is a managed mutual fund that tends to perform ...
  3. Index Investing

    Index investing is a passive strategy that attempts to track ...
  4. Index

    An index measures the performance of a basket of securities intended ...
  5. Enhanced Index Fund - EIF

    An enhanced index fund is a fund that seeks to enhance the returns ...
  6. Total Return Index

    Total return indexes include any dividends in the calculation ...
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

    3 Index Funds with the Lowest Expense Ratios

    Read detailed information about index mutual funds with some of the lowest expense ratios in their categories, and learn about their pros and cons.
  3. 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.
  4. Investing

    The Hidden Flaws of Index Investing

    Index investing isn't always better than active investing. Here's why.
  5. Investing

    The lowdown on index funds

    If you can't beat the market, why not join it? Read on to see what your options are.
  6. Investing

    How Vanguard Index Funds Work

    Learn how Vanguard index funds work. See how the index sampling technique allows Vanguard to charge low expense ratios that can save investors money.
  7. Investing

    The Pros and Cons of Indexes

    Learn about the advantages and disadvantages of stock indexes and passive index funds. Discover how there is an opportunity cost to using index funds.
  8. 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 ...
  9. Investing

    3 Fidelity Mutual Funds with Long Track Records

    Learn about mutual funds, provided by Fidelity Investments, that have long track records. Learn about the risks and rewards of lower-quality bonds.
  10. 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. Is it possible to invest in an index?

    While you cannot buy indexes, which are just benchmarks, there are three ways for you to mirror their performance. 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. Diversification

    Diversification is the strategy of investing in a variety of securities in order to lower the risk involved with putting ...
  2. Intrinsic Value

    Intrinsic value is the perceived or calculated value of a company, including tangible and intangible factors, and may differ ...
  3. Current Assets

    Current assets is a balance sheet item that represents the value of all assets that can reasonably expected to be converted ...
  4. Volatility

    Volatility measures how much the price of a security, derivative, or index fluctuates.
  5. Money Market

    The money market is a segment of the financial market in which financial instruments with high liquidity and very short maturities ...
  6. Cost of Debt

    Cost of debt is the effective rate that a company pays on its current debt as part of its capital structure.
Trading Center