In recent years, FTSE 100 exchange-traded funds (ETFs) or tracker funds have increased in popularity. Financial experts often advise if youre 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 dont even know what FTSE 100 tracker funds are or how they work. If youre in this boat, dont stress. Here, Ill explain what they are, how they work, and how to invest, and Ill 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 UKs 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 youre 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, youll 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 youll 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, theres not really much point investing small amounts, such as 50 or 100, as youll lose a fair chunk of your money to trading costs. Youre better off stockpiling your money until you have at least 500 saved before investing.
FTSE 100 trackers: a good investment?
To answer this question, lets look at some of the advantages and disadvantages of FTSE 100 tracker funds.
Advantages:
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You get exposure to 100 companies which lowers your risk
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You get exposure to some world-class companies
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The FTSE 100 has a strong dividend yield meaning youll receive regular income
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Fees are very low
Disadvantages:
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You only get exposure to UK-listed stocks meaning you wont get exposure to the likes of Apple, Google, or Amazon
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You get exposure to some low-quality companies
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You will never beat the market, as youll 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 youre 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 youre a more advanced investor and youre 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.
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