Why is my tracker fund so volatile?

 

Investors are piling money into tracker funds, with more invested in 2010 than in any year in the last decade.

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Investors are drawn by the lower cost of tracker funds and many believe they offer a less risky option, since as their name suggests, they track shares in a whole index, rather than trying to pick winners.

However, they can be more volatile than savers think.

Fans believe they are better than those run by fund managers because human beings will not be able to always beat the stock market.

More than two thirds of investment funds regularly fail to beat the index of the stock market they are invested in.

A good manager will still beat a tracker. The best in the UK All Companies sector are well ahead, with the L&G UK Alpha fund delivering returns of 98.5% over five years while the best tracker, the HSBC FTSE 250, only returned 28.9%.

But over the same period the worst tracker still made 4%, while the worst fund run by a manager, the Rathbone Recovery, lost a whopping 52.6%.

Figures from data experts Morningstar show the average tracker fund return within the IMA UK All Companies sector was 15.2% over the past five years. This compares to an average return of 11.4% for funds with a manager.

Paying less for the fund is one of the key selling points.

Because they do not need batallions of experts, economists or strategists, the cost of running them is a lot lower.

Generally trackers have no upfront fees and have an annual charge of between 0.25% and 1% a year. Funds with a manager can carry a headline charge of between 1% to 1.5% a year.

But the true costs can be significantly higher. The average Total Expenses Ratio, including extra costs such as legal fees, is 1.68%, but can be more than 2%.

The notion that a UK tracker is based on household name blue chip companies is wide of the mark, however.

Today's FTSE 100 index features names many may never have heard of, including Randgold Resources, Vedanta Resources and Intertek Group.

More than 18% of the FTSE 100 is made up of banks and insurance companies and almost 20% is made up of oil and gas producers.

Mark Dampier, head of research at financial adviser Hargreaves Lansdown says this can expose investors to extreme events.

He said: 'If the bottom falls out of the commodity sector the FTSE would likely fall some way. The FTSE 100 is powered right now by mining and oils, so you still get the extremes and you are following a trend.'