What is FTSE 100 Tracker? Cheapest Way to Invest in FTSE?7 min read

Exploring to know what is FTSE 100 Tracker? FTSE tracker funds are low-cost, passive investment funds that track the performance of an FTSE index. 

An FTSE (Financial Times Stock Exchange) index is a list of stocks traded on the London Stock Exchange. They show the performance of the UK stock market. For example, the FTSE 100 reflects the UK’s largest 100 companies.

Many indices represent different FTSE segments, such as the FTSE 100 Index, the FTSE 250 Index, the FTSE 350 Index, the FTSE All-Share Index, the FTSE Fledgling Index, and the FTSE Small Cap Index.

FTSE 100 Tracker Returns

Two of the most famous FTSE 100 tracker funds are the HSBC FTSE 100 Index and the Legitimate & General UK 100 Index Trust. You can see both on the Hargreaves Lansdown platform.

Looking at the appearance of the accumulation version of the HSBC fund (which reinvests dividends), it’s returned a total of -1.7% over the last five years. Meanwhile, the accumulation version of the Legal & General fund has delivered a total of -0.5%. Averaging this out, you’re seeing a total return of -1.1% over the last five years.

This means that had you invested £5k in an FTSE 100 tracker five years ago, your investment would now be worth around £4,945. And that’s before Hargreaves Lansdown’s platform charge of 0.45% per year.

What is an Index Tracker Fund, and How Does it Work?

Tracker funds are investment funds that track a market index’s movement, such as the FTSE 100. So when an index rises, the value of your fund increases, and conversely, when the index falls, your investment in the fund falls. Tracker funds are low-cost investment options and allow you to diversify your portfolio over different asset types and countries.

There is at least one index for each global stock market; for instance, the FTSE 100 index represents the 100 biggest companies on the UK stock market while the FTSE All-Share index outlines all the companies listed on the UK stock market.

How do Index Tracker Funds Track an Index?

Most trackers mimic the performance of an index in one of two methods:

Full Replication

This method is where the fund buys shares in all companies within an index. So the FTSE 100 index tracker fund using the robust replication method will buy shares in all 100 companies in the index in proportion to the size of the companies within the index. Employing the full replication method means that funds mirror the index as closely as possible (i.e., have a small tracking error).

Partial Replication

This method is often used when it is hard to buy all the shares in an index. A fund will rather invest in a sample of an index that represents the whole index. When an index has many companies, the time and costs it would take to hold all the companies in the index would be detrimental to the portfolio’s value.

How Does a Tracker Fund vary from an ETF?

An index tracker fund is a fund that you can invest in the same way you would a regular investment. The cost changes daily and reflects the value of the assets it holds.

An Exchange Traded Fund (ETF) is traded on the stock market and bought and sold in the same way you would buy and sell shares. Prices change throughout the day, so investors get a set price that should reflect the underlying index at the point they buy or sell.

What to View before Buying an Index Tracker Fund

An FTSE 100 index tracker, for instance, reflects the fortunes of the FTSE 100 index so that when the index rises, an investor will benefit, but when the FTSE 100 falls, the worth of their investment falls as well.

Tracker funds are what is known as a passive investment, so they will slavishly follow an index. They can suffer disproportionately if a particular sector that makes up a large part of the index goes through a downturn.

Conversely, actively managed funds run by a fund manager will typically buy stocks that they believe will do much better than the index and have much more freedom to create their portfolios. This means that, in theory, actively managed funds can react quicker to a low investment environment than a tracker fund. However, if an actively managed fund makes some poor investment options, then the results can be catastrophic, as we have seen in the past.

Tracker funds are usually cheaper than actively managed funds, and when investing for the long term, this can make a sizeable difference to the overall investment performance. Research shows that over the long term, active fund managers seldom outperform passive index funds.

Tracking Errors

A tracking error is a measure of how much the fund in question deviates from the actual index. This tracking error can be caused by fund costs, money flowing in and out of the fund, or changes in the constituent shares making up the index. The lower a fund’s tracking error, the better, as it means it better reflects the performance of the tracking’s relevant index.

The Cheapest Way to Invest in an FTSE 100 Index Tracker Fund

As stated first, investing in index tracker funds is cheaper than investing in actively managed funds due to the additional management required with an actively managed fund. Index tracker funds are affected and usually managed automatically by computers. Most investors utilize a tracker fund as a long-term buy and hold’ investment, so switching charges are less relevant.

When comparing index tracker funds, you should examine the Ongoing Charges Figure (OCF) as they differ from fund to fund. This value represents the total cost of running the fund. It includes administrative costs such as maintaining records, producing reports, calculating the daily unit price, and paying for any research that goes into deciding which assets to buy and sell.

What Makes a Good Tracker Fund?

The best way to judge a passive investment fund’s performance is to look at its tracking error. This shows how far the fund’s performance deviates from the original index its tracking. Of course, no tracker fund will identically match an index, as a yearly charge is levied on the funds. A tracking error of 0% would indicate perfect replication.

A tracking error that is just the fund’s cost is an indicator of an excellent passive investment. ETFs generally have a better tracking error record than tracker unit trusts and OEICs, and synthetic ETFs typically improve on this further. But, as we have explained, these options can come with additional risks that you might not be comfortable taking.


What is an FTSE 100 tracker?

Tracker funds are investment funds that track a market index’s movement, such as the FTSE 100. So when an index rises, the value of your fund increases, and conversely, when the index falls, your investment in the fund falls.

What is the best tracker fund?

Here are the best tracker funds:
FTSE 100:- iShares Core FTSE 100 UCITS ETF – (ISF)
FTSE 250:- Vanguard FTSE 250 UCITS ETF – (VMID)
S&P 500:- iShares Core S&P 500 UCITS ETF – (CSP1)

Do tracker funds pay dividends?

Indices are often quoted without dividends, whereas the tracker fund performance typically includes dividends.

Can you lose all your money in ETF?

Leveraged ETFs (which generally include options or futures) are the ETFs. Where you can lose a lot of money in a hurry (and with no particular prospect for recovery). Even when there is no change or market crash, you could lose half (or all) of your money in a week.

Can you invest money in the FTSE 100 as a whole?

You can trade the FTSE 100 through cash indices or index futures. While you cannot invest directly in the FTSE 100, you can invest in FTSE 100 ETFs or individual company shares listed on the index. Before trading the FTSE 100, make sure you do your research and learn how the index works.