A “passive fund” can also be known as an “index tracker”, “index fund” or simply “tracker” and aims to replicate (or copy) a particular stock market index with the most common perhaps being the FTSE 100. As it doesn’t rely on fund managers or stock pickers, they tend to be an extremely cost-effective form of investment.
A tracker therefore aims to replicate (or copy) the index by either buying the correct amount of shares to create a mirror (physical replication) or by buying other types of assets issued by other companies such as hedge funds known as “derivatives” (synthetic replication). The aim is so that when the market being tracked increases in value, the passive fund increases at the same rate. Of course, this also works with a falling market too! The aim of the tracker is therefore to copy the performance as exactly as it can and can be measured by looking at the funds “tracking error” – after all if the market goes up 5% and your “tracker” goes up 4% then it really isn’t a very good tracker!
Here at Financial Fortress we have access to the entire market so if you are especially cost sensitive, a tracker may be a good place to start, however imagine someone pulled a gun on you – would you dodge the incoming bullet if you had chance? A tracker wouldn’t (it would track the market down) whereas an active fund may be able to (assuming the manager saw the bullet coming). As always, get in touch with your local experts to help build your very own Financial Fortress!