What are index-tracking funds?

An index-tracking fund, also known as a tracker fund, is an investment that follows a market index. It invests in the index's constituent shares to match its returns.

The goal of an index-tracking fund is to match the returns of a market index.

A full replication strategy is used to build a portfolio that mirrors the index. The fund invests in the index's constituent shares in the same proportions as their weightings.

Other strategies include:

Index-tracking funds are passively managed. Fund managers adjust the portfolio only when the index's constituent shares or weightings change. They simply copy the index or invest in index-tracking collective investment schemes (ITCIS).

Tracker funds usually have lower fees than actively managed funds. Fund managers simply follow the index weightings rather than spending time and resources analysing the market to pick stocks. This reduces costs , and the savings are passed on to you as lower management fees.

You can easily see how your fund is performing because it holds the same or similar assets as the index. Its performance directly mirrors the index. To check your MPF performance, simply look at how the market index is doing.

If you're optimistic about the long-term growth of a region, a tracker fund allows you to invest in that market without worrying about short-term changes or making precise, active investment decisions.

Before investing in an index-tracking fund, think about your risk tolerance, the fund's goals, and its risk level. These funds often invest in a limited number of shares, so they may offer less risk diversification than other funds.

Also, any trading costs, fiscal charges[@mpf-fiscalcharges], stamp duties and other levies payable can create a tracking error, which is a gap between the fund's actual returns and the index's performance. For more information on risks, please refer to the principal brochure of the relevant MPF scheme.