There are three main things to consider when you are choosing an index tracker, and they are all fairly common-sense: check for charges, make sure you know which index the tracker actually tracks, and take note of the tracking error.
Obviously, the less you have to pay in charges, the better. Trackers tend to be fairly low-cost in terms of fees, as few have initial or exit charges. Most trackers have annual charges under 1%, so keep looking if you are asked to pay more!
A word of warning: some companies split their annual charges in two and only mention one of them when they advertise. Get around this by carefully reading the Key Features document you will get with your tracker application, as it will list off all charges (it has to by law).
Which index does it track?
You can buy a tracker for just about any index – European, Far East, US or even global. You can also buy a fund that tracks shares in a specific industry, like biotech or telecommunications. But in the UK, most trackers follow the FTSE 100 or FTSE All-Share, both of which cover shares listed on the London Stock Exchange. The FTSE 100 covers the largest 100 companies by market value. The All-Share covers the top 800 or so.
No one can predict which indices will do well and which won’t. Do your own research and consider diversifying your investments (the old ‘eggs in baskets’ adage) but remember you can invest in as many trackers as you like. An inexpensive UK tracker that follows the FTSE 100 may be a good place to start, but you really can go anywhere with this type of investment, depending on how the amount you are prepared to invest and the degree of risk you are willing to accept.
No tracker exactly matches its chosen index (it is impossible to replicate exact buy and sell times) but you can check the degree to which a fund succeeds by looking at tracking error. The degree of error should be low -- the lower the better, in fact. If the tracker you are looking at does not publish tracking error, you can get an idea by comparing the performance of the fund against the performance of the index: the difference will be made up of charges and tracking error. One final note: trackers that have been around several years tend to have a lower level of tracking error than do newer tracker funds.
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