Tracker funds and exchange traded funds

Tracker funds and exchange-traded funds (ETFs) are investments that aim to mirror the performance of a market index. A market index follows the overall performance of a selection of investments. The FTSE 100 is an example of a market index – it includes the 100 companies with the largest value on the London Stock Exchange.

When might a tracker or ETF be right for you?

If you don’t understand a financial product, get independent financial advice before you buy.

These might be for you if:

How index trackers work

This passive trading makes index trackers cheaper to run than actively managed funds, so many have lower charges.

Risk and return

Access to your money

Charges

Tracker funds and ETFs usually have much lower charges than managed funds

Because tracker funds and ETFs have low running costs, charges are usually much lower than for a managed fund.

You might encounter a number of different types of charges.

Safe and secure?

Fund assets are generally held in safekeeping on investors’ behalf by a trustee or depository.

If an authorised investment firm goes into default, your assets are protected.

You continue to own your investment and the fund’s assets are still invested as before.

If your money is mismanaged – for example, the fund manager invests it in something the fund shouldn’t invest in – then the firm would be required to compensate investors.

If it did not have enough money and, therefore, went out of business, then the outstanding compensation would be covered by the Financial Services Compensation Scheme (FSCS) up to £50,000 per person.

You cannot claim compensation simply because the value of your investment falls.

All investments involve some risk.

An index tracker will lose money if the index it is tracking goes down.

The FSCS applies to financial advice and investment firms, not shares.

ETFs bought directly are therefore not covered by the FSCS.

Find out more information on FSCS compensation

Where to get a tracker fund or exchange traded fund

You can buy tracker funds:

You can find out more about different types of funds on the Investment Management Association websiteopens in new window.

You can buy ETFs in the same way you would buy regular company shares on the stock exchange.

If you’re not sure what kind of investment fits your needs, it’s a good idea to talk to an Independent Financial Adviser (IFA).

Tax

As of April 2018, all individuals are eligible for a £2,000 tax-free Dividend Allowance.

Dividends received by pension funds or received on shares within an ISA will remain tax free and won’t impact your dividend allowance.

There are three dividend tax bands which apply to all dividend income in excess of £2,000 per year :

You can find more information and examples in GOV.UK’s Dividend Allowance factsheet.

If your fund has invested in corporate bonds, gilts or cash, it should pay interest, and that interest will be treated differently to dividend income.

As of April 2016, you are entitled to a personal savings allowance.

This means you don’t pay tax on the first £1,000 you earn from interest from:

Any profit you make when selling your shares or units counts towards your Capital Gains Tax annual exempt amount.

Losses can be offset against other gains in the same tax year or carried forward to future years.

Tax-free options

Many tracker funds and Exchange Traded Funds can be held in an ISA.

In this case, your income and capital gains will be tax-free.

If things go wrong

Most fund managers are regulated by the Financial Conduct Authority.

If you’re unhappy with the service you get or you want to make a complaint, read Sort out a money problem or make a complaint.