What are FTSE 100 tracker funds and are they a good investment?

Want to learn more about FTSE 100 (INDEXFTSE: UKX) tracker funds and how they work? Here’s everything you need to know.

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In recent years, FTSE 100 exchange-traded funds (ETFs) or ‘tracker funds’ have increased in popularity. Financial experts often advise if you’re looking for a low-cost, no-fuss way of investing in the UK stock market, a FTSE 100 tracker can be a good choice.

However, a lot of people don’t even know what FTSE 100 tracker funds are or how they work. If you’re in this boat, don’t stress. Here, I’ll explain what they are, how they work, and how to invest, and I’ll also examine the pros and cons of investing in them.

What is a FTSE 100 tracker fund?

A FTSE 100 tracker fund is a low-cost investment fund that tracks the performance of the UK’s main stock market index – the FTSE 100. This index is made up of the 100 largest companies in the UK and includes names such as Royal Dutch Shell, HSBC, and Lloyds Bank.

How does a FTSE 100 tracker work?

When you’re invested in a FTSE 100 tracker, your money will rise and fall in sync with the FTSE 100, minus a very small amount for fees.

So, for example, if the Footsie rises 10% for the year, your investment will rise close to 10% too. However, if the index falls by 5% in a month, your capital will decrease in value by around 5%.

How do you buy a FTSE 100 tracker?

To buy a FTSE 100 tracker, you’ll need a share trading account with a broker such as Hargreaves Lansdown or AJ Bell. Your account could be a regular trading account, an ISA, or a SIPP. FTSE 100 tracker funds trade like regular stocks, which means you’ll pay a commission fee of around £10 each time you buy and sell units.

You can invest as much or as little as you want into a FTSE 100 tracker. However, with commissions setting you back roughly £10 per trade, there’s not really much point investing small amounts, such as £50 or £100, as you’ll lose a fair chunk of your money to trading costs. You’re better off stockpiling your money until you have at least £500 saved before investing.

FTSE 100 trackers: a good investment?

To answer this question, let’s look at some of the advantages and disadvantages of FTSE 100 tracker funds.

Advantages:

  • You get exposure to 100 companies which lowers your risk

  • You get exposure to some world-class companies

  • The FTSE 100 has a strong dividend yield meaning you’ll receive regular income 

  • Fees are very low

Disadvantages:

  • You only get exposure to UK-listed stocks meaning you won’t get exposure to the likes of Apple, Google, or Amazon

  • You get exposure to some low-quality companies

  • You will never beat the market, as you’ll always receive the return of the FTSE 100 minus a small fee

Weighing up these pros and cons, a FTSE 100 tracker funds will be suited to some investors more than others. For example, if you’re just starting out in the world of investing and looking to build a portfolio from scratch while keeping costs low, a FTSE 100 tracker could be a great place to start.

However, if you’re a more advanced investor and you’re looking to beat the market, I believe you may be better off constructing a portfolio that consists of a number of high-quality companies and top-performing funds.

Ultimately, the answer to this question comes down to your personal goals, requirements, and risk tolerance.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Edward Sheldon owns shares in Royal Dutch Shell, Lloyds Banking Group, Hargreaves Lansdown, Apple, and Alphabet. John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. The Motley Fool UK owns shares of and has recommended Alphabet (C shares), Amazon, and Apple. The Motley Fool UK has the following options: long January 2020 $150 calls on Apple and short January 2020 $155 calls on Apple. The Motley Fool UK has recommended Hargreaves Lansdown, HSBC Holdings, and Lloyds Banking Group. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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