Tracker Academy

Index trackers come in all shapes and sizes. In essence there are just six simple variants.

  1. Index tracking mutual or unit trust
    An open ended vehicle that is priced daily and which may issue new units on a daily basis as more and more investors buy in. These are typically run by large fund management groups like Fidelity, Scottish Widows, Legal and General and HSBC. There should be no discrepancy between the underlying value of the units and the price quoted and any dividends that come from holding the shares in the portfolio are distributed as a yield, paid on a regular interval, to unit holders.
  2. Index tracking closed end fund (also known as an investment trust)
    Investment trusts issue a fixed number of shares although they may also issue subsequent tranches of shares to raise additional capital. They may also boast fixed terms i.e they wind up after a specified date and their institutional structure is like any other quoted company. They have a board, which reports interims and finals, and boasts shares that are quoted on a real time basis although the trust will typically issue a daily net asset value update. Crucially a difference may emerge between the underlying net asset value and the market price. This is expressed as either a discount or premium to net asset value (NAV). Also like unit trusts, investment trusts pay a regular dividend where there is an income obtained from holding the underlying shares in the index.
  3. Certificates
    These are a fairly new innovation in the investment market and are in fact a hybrid product. They were developed by traditional covered warrants issuers like SG who wanted to move into the index tracking space. Investors typically buy a certificate that offers direct exposure to an index for an open ended period of time. Those funds are then used to buy into derivatives based products that buy that index. Well look at this relatively new category in a little more detail later in this chapter but for the time being its worth noting that there is no tracking error with these products although there is a substantial downside - you get no income from holding the underlying index.
  4. Structured product investment trusts
    These strange and exotic beasts offer a very different tracking proposition. They are structured like an investment trust - theyre closed end, typically with a finite life span - and they track a core index, frequently the FTSE 100. But they also offer some form of geared upside - typically more than 100% of the increase of the underlying index, and also frequently offer some form of capital protection on the issue price provided the index doesnt fall too much in value.
  5. Investment Notes
    These are much the newest innovation in the market - effectively theyre a cross between a certificate and structured product investment trusts. Theyre issued by Barclays (not their iShares unit note) and theyre traded on the secondary market like a structured investment trust
  6. Exchange traded funds (ETFs)
    These have rapidly become the most popular form of index tracking fund. Theyre almost like a cross between an open ended unit trust and an investment trust. Like a trust, theyre an investment company as such with a fixed issue of shares and real time quotes but theyre open-ended and bear many of the same characteristics as a unit trust. They developed in the USA and have now become wildly popular as the default form of low cost index tracking although more traditional open ended funds like the Vanguard range are still hugely popular.

  ETF comparisons >