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. Indexing

    In the financial markets, indexing can be used as a statistical ...
  2. Index Fund

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

    A fundamentally weighted index is a type of equity index in which ...
  4. Index Investing

    Index investing is a passive strategy that attempts to track ...
  5. Enhanced Index Fund - EIF

    An enhanced index fund is a fund that seeks to enhance the returns ...
  6. Benchmark

    A benchmark is a standard against which the performance of a ...
Related Articles
  1. Investing

    5 Things You Need To Know About Index Funds

    Index funds, at their best, offer a low-cost way for investors to track popular stock and bond market indexes. But not all index funds are created equally.
  2. 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 ...
  3. 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.
  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

    The Hidden Flaws of Index Investing

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

    Enhanced Index Funds: Can They Deliver Low-Risk Returns?

    These funds may look appealing. Find out whether they can really live up to all of their promises.
  7. Investing

    The 4 Best U.S. Large Cap Index Mutual Funds

    Discover the top four mutual funds that use passive investment approaches and follow stock indexes composed of U.S. large-cap equities.
  8. Financial Advisor

    3 Best Global Equity Index Mutual Funds

    Discover three no-load and low-fee global equity index mutual funds that can add worldwide diversification and steady returns to a portfolio.
  9. 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.
  10. Investing

    How to Use Index Funds to Diversify Your Portfolio

    Index funds can act as quality diversification tools.
RELATED FAQS
  1. 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 >>
  2. Why can you short sell an ETF but not an index fund?

    Because you purchase and redeem mutual fund units from the mutual fund company and (generally) not on the open market, you ... Read Answer >>
  3. What are the disadvantages of an index fund over an actively managed fund?

    Read the advantages an actively managed fund has over its more staid compatriot, the indexed fund, and make your own decision ... Read Answer >>
Hot Definitions
  1. Economies of Scale

    Economies of scale refer to reduced costs per unit that arise from increased total output of a product. For example, a larger ...
  2. Quick Ratio

    The quick ratio measures a company’s ability to meet its short-term obligations with its most liquid assets.
  3. Leverage

    Leverage results from using borrowed capital as a source of funding when investing to expand the firm's asset base and generate ...
  4. Financial Risk

    Financial risk is the possibility that shareholders will lose money when investing in a company if its cash flow fails to ...
  5. Enterprise Value (EV)

    Enterprise Value (EV) is a measure of a company's total value, often used as a more comprehensive alternative to equity market ...
  6. Relative Strength Index - RSI

    Relative Strength Indicator (RSI) is a technical momentum indicator that compares the magnitude of recent gains to recent ...
Trading Center