30 Jul 2025

Investment: Why don’t I just stick my money in some tracker funds?

“Why don’t I just stick my money in some tracker funds?”

This is a relatively common suggestion when I talk to investors who aren’t yet at the point of considering the complexities of retirement. Passive investments in tracker funds have grown hugely over the past few decades, and the lower costs of such funds or ETF’s are a big reason why.

Like most things in finance however, the answer may not be as simple as it might first seem. A few key questions to consider are:

• What index or indexes are you tracking?
• How much risk can you and should you take?
• What hidden costs are there in tracking?
• Are there potentially better investment strategies available?

What are you Tracking?

The point of a tracker fund is to track or mimic an index of investments. An index is a basket of stocks, taken to represent a particular geography, market, sector, company size, or a theme around which companies may be clustered (such as demographic trends). There are several million stock market indexes already in existence. This is not only because many fund managers create their own index against which to compare their fund (sneaky, but no rules against it), but also because there are so many different approaches to investment that can be dreamt up that there really is no limit to how many different ways one could pull together investments into an index.

Even if you were quite specific and wanted an all-world global equity index – there are subtle and sometimes even quite significant differences in how various index providers choose to do this. Two of the most famous global indices are the MSCI World and the FTSE All-World. They ostensibly track the same thing – a basket of equities to represent the stock exchanges of the entire world, and they are similar in many ways – but with some interesting differences. You can read about these in detail here, but to summarise a few examples:

• Both MSCI and FTSE limit total investment in Chinese shares to less than 25% of the actual Chinese market capitalisation – ostensibly to reflect the limited availability of Chinese shares to outside investors
• MSCI treats South Korea as an Emerging Market and includes it on its EM indices, whereas FTSE includes South Korea among developed markets (so if you invested in a fund tracking MSCI Emerging Markets and also a fund tracking FTSE Developed Markets you’d be investing in South Korea twice over)
• MSCI global indices capture 85% of the investable global universe, but exclude the bottom 15% which are “small cap” firms, whereas FTSE global indices track 90% and only exclude the bottom 10% – meaning that FTSE indices usually contain more total companies (as of Dec 2024 FTSE All-World contained 4,247 companies compared with MSCI having 2,647 companies)
• Overall costs and performance of funds based on these two index providers have been broadly similar for Developed Markets over the last 5 years, but a tracker fund of the FTSE Emerging Markets index has outperformed the MSCI Emerging Markets equivalent by 8% over the last 5 years – although this could easily be reversed in the future (stats and info from JustETF – see link above for details).

Because of these complexities, there are actually still quite a lot of decisions that need to be made when ‘tracking’ or passively investing – including investment type (e.g. ETF vs fund), selection of what to track, and then also how best to carry this tracking out. Most people doing this on a DIY basis either blindly choose from a limited range first offered or recommended to them by a provider, or end up with a haphazard array of choices made over time – becoming their own accidental portfolio manager!

How much investment risk can you and should you take?

An equity tracker fund consists entirely of equity investments. This means that your exposure to both the ups and downs of global stock markets will be much greater than if you also had other assets, such as fixed income, commodities, or other hedged or ‘absolute-return’ strategies, among your investments. This level of exposure to volatility is a very personal choice, and will depend on a range of factors including your time until retirement or a need to encash the investment, and your emotional journey with investments. Those with less investing experience or a more nervous disposition, or who like to tinker and ‘fiddle’ with their investments, may cost themselves a great deal if they try to “time” their entry and exit from investment markets during periods of upheaval.

What are the hidden costs of trackers?

Tracker funds are cheap in part because they tend to operate in a very mechanical fashion. When the index they track is changing, the fund then makes the same changes in order to mimic the index. A famous example is that when a new company enters an index (for example when Tesla was added to the S&P 500) then all of the funds copying that index need to add the new stock and sell any companies that are being booted out of the index. Unfortunately, this tends to mean that a large number of passive investment funds are buying company shares at the same time as the share prices are rising due to the increased demand (and also selling as everyone else also wants to sell). The best analogy for this is that many index funds are buying roses on Valentine’s Day because of their inflexible, mechanical approach. While the operating costs of the fund (e.g. the OCF – see our article here on investment costs) may be low, the hidden costs of this buying and selling pattern can be substantial – for tracking the S&P 500 these hidden costs are estimated to average 0.2% per year.

Are there better strategies available?

Long-run studies by Nobel prize-winning economists have shown that historically, there are factors which can provide additional risk-adjusted returns over a pure passive investment strategy. These include tilting investments towards smaller sized companies, ‘value’ style stocks which are perhaps less fashionable than those priced at heady multiples to their earnings, and profitable companies. Even if we start with the assumption that markets are efficient, and we should largely track the global market capitalisation of different geographies, pursuit of these factors, as well as efficient execution of investments in a more flexible way (a hybrid of passive and active) can help to achieve long-term outperformance. For more information have a look at our Hoe Bridge Wealth investment philosophy which explains this further.

Does your investment portfolio have a clear rationale as well as high-quality execution?

If you want to discuss your investments or wider financial planning – book a free initial chat with me
https://calendly.com/duncan-bw-hoebridgewealth/30min

NOTE: The value of your investment can go down as well as up. Past performance is not a reliable indicator of future results. None of the above is financial or investment advice and you should speak to me or someone else professionally qualified to give you advice specifically tailored to your circumstances.