9 Things to Know About Index Tracker ETFs Before You Invest

1. What are they?

ETF =  Exchange-traded Fund, which means the fund is available to invest in via an exchange.

Index Tracker = the ETF is designed to track a benchmark index such as the Nasdaq 100 (100 largest NASDAQ-listed companies), or the S&P 500 (500 largest listed companies in the US).

“An S&P 500 ETF tracks the stocks of the 500 largest listed companies in the US.”

2. Why do they offer diversification?

Because the ETF replicates a benchmark like the S&P500, it tracks the stocks of the 500 largest companies in the US. Therefore, by investing in an S&P500 ETF you get exposure to all 500 of these companies’ stocks, rather than investing in all 500 individually or picking which ones you’d prefer.

ETFs aim to closely match the returns of their underlying index, offering investors the opportunity to participate in overall market growth or a subset of it.

For example, the below visual illustrates the companies the S&P500 included in 2023. It includes some of the biggest companies in the world such as Apple, Microsoft, Nvidia, Amazon, and Google.

Bubble chart showing all of the S&P 500 companies in 2023, organized by sector and sized by their weighting in the index.

3. Why do they have low fees?

Typically Index Tracker ETFs have lower management fees compared to actively managed funds, making them a cost-effective option for long-term investing. The lower fees are mainly attributable to one thing:

• Not having to pay expensive salaries to managers to do research and make buy and sell decisions on stocks.

For example, Blackrock’s iShares, one of the Biggest ETF providers in the world, typically charges an annual fee between 0.03% and 0.20% on the investment value for their most popular ETFs. Actively managed funds can charge more than 5 times as high.

4. What about performance?

This article by S&P global describes the age-old debate between the performance of actively managed funds and passively managed (AKA Index tracker) funds.

“Despite the fact that they put a lot of effort into it, the vast majority of active fund managers underperform the market benchmark they're trying to beat.”

And they charge lots of fees for trying.

Despite occasional bouts of outperformance by actively managed funds, such periods are typically short-lived.

A recent article published by the Financial Times, states that over a 15-year period, only 3% of actively managed funds were able to beat the equivalent passive fund.

5. Can I do better by selecting stocks myself?

No, you very likely can’t - at least not in the long term. Very few do and even professionals spending their full days trying don’t get it right (refer to point 4 above).

6. Why is liquidity a plus?

ETFs offer flexibility, as they can be bought and sold throughout the trading day at market prices, providing liquidity to investors. This means you can access the funds if you need it.

7. What are the most popular ETFs?

Here’s a list of the biggest ETFs in the world. As you can see, the top 3 cover the same index - the S&P500.

8. How to choose ETFs?

To choose the right index tracker ETF, it's important to understand the index it follows and what is gives you exposure to, the fees you'll pay, and how closely it tracks its benchmark index. For example, the SPDR S&P 500 ETF Trust gives exposure to the 500 largest companies in the US. The Vanguard FTSE Developed Market ETF offers exposure to markets outside the US including Western Europe, Japan, and Australia.

9. Where are they available?

They are widely available on online brokerage platforms such as Interactive Brokers, Easy Equities, Swissquote and many more!

Disclaimer: For informational purposes only and should not be considered personalized financial advice.