Index-tracking Funds

Index-tracking funds, commonly called index funds or tracking funds, are funds set up to track the index performance of a particular investment market.

The investment objective of an index-tracking fund is to provide investors with returns substantially in line with the performance of the relevant index.

When constructing the investment portfolio of an index-tracking fund, a full replication strategy may be adopted by investing substantially in the constituent shares of the relevant index broadly in proportion to the respective weightings of the constituent shares such that the fund can track the performance of that particular index as closely as possible.

An index-tracking fund may adopt other tracking strategies such as representative sampling and synthetic replication.

As the investment portfolio of such a fund often replicates a particular index through direct investment, or through investment in one or more index-tracking collective investment schemes (ITCIS), the fund manager will only need to make corresponding adjustments to the investment portfolio of the fund when there are changes in the constituent shares of the index tracked or in their weightings.

In other words, index-tracking funds are passively managed.

Advantages of an index-tracking fund

  • The management fees charged for an index-tracking fund is generally lower than that for an actively-managed fund
    As an index-tracking fund makes investments by following the weightings of constituent shares in the index tracked, the fund manager or fund company normally does not need to invest so much time and resources to analyse the long-term development of the market and the entities invested. As a result, it follows that the fund management fee charged for an index-tracking fund can generally be lower than that for an actively-managed fund.
  • It's easier for investors to keep abreast of fund performance
    Index-tracking funds normally track a particular index through direct investment or through investment in one or more ITCIS. Since the performance of the     constituent shares of the relevant index and their weightings are already directly reflected in the index-tracking fund, there is high transparency with such a fund and investors can easily keep abreast of fund performance.

 

As index-tracking funds generally make their investments by replicating the weightings of constituent shares in the indexes tracked, the funds will have     performance substantially in line with the relevant index as opposed to the result of active investment decisions made by fund managers.

If investors are optimistic about the long-term economic situation of the region they have placed their investments in, they need not worry about fluctuations of the index-tracking fund and the general market performance in the short run.

Notes to investors

Before deciding to invest in an index-tracking fund, investors should first consider their own risk tolerance, the investment objectives of the fund and the risk rating concerned. As an index-tracking fund may principally invest in a couple of dozens of constituent shares only, risk diversification achieved by the use of an index-tracking fund may not be as effective as in the case of other funds.

In addition, as a result of trading cost, fiscal charges*, stamp duties and other levies payable when there are changes in the constituent shares or when adjustments are made to the investment portfolio for cashflow reasons, there may be a certain discrepancy known as the tracking error between the actual returns of an index-tracking fund and the performance of the relevant index or the general market performance. Investors should refer to the corresponding Principal Brochure of the relevant MPF scheme for further details of the risks associated with investing in a specific index-tracking fund.

*Mechanism of fiscal charges may include the following or other circumstances: for certain investment funds in the market, when calculating the Issue Price and Redemption Price, to ensure all Unitholders are treated fairly, where the number of Units of a fund to be issued on a Dealing Day exceeds the number of Units of the fund to be redeemed on that Dealing Day, the Manager is given the power under the trust deed of the fund, in determining the issue price of a Unit of the fund, to add to the Net Asset Value per Unit (before making any rounding adjustment) an amount, for the account of the relevant Fund, which it considers to be an appropriate allowance to reflect duties (such as stamp duties) and charges which would be incurred if the investments of the relevant Fund were to be acquired at the values attributed to them. Similarly, where the number of Units of a fund to be redeemed on a Dealing Day exceeds the number of Units of the fund to be issued on that Dealing Day, the Manager is empowered, when determining the redemption price of any Unit, to deduct for the account of the relevant Fund from the Net Asset Value per Unit (before making any rounding adjustment) an amount which it considers to be an appropriate allowance to reflect duties (such as stamp duties) and charges which would be incurred if the investments of the relevant Fund were to be sold at the values attributed to them.

Information on index-tracking funds available under HSBC MPF Schemes.

Important notes


The above information is provided solely for reference. Investments involve risks. Past performance is not indicative of future performance. The value of financial instruments, in particular stocks and shares, and any income from such financial instruments, may go down as well as up. For further details including the product features and risks involved, please refer to the relevant Principal Brochure.

If you're in doubt about the meaning and effect of the content of this article, you should seek independent professional advice.

The Hongkong and Shanghai Banking Corporation Limited is the sponsor and administrator of HSBC MPF schemes.