Research & Insights

Diversify your portfolio with index-trackers

Why use index-tracker funds to diversify your portfolio?

Diversifying your portfolio doesn’t have to be hard work. Find out how index-tracker funds can help you avoid putting all your eggs in one basket.

What are index-tracker funds?

As the name suggests, an index-tracker fund ‘tracks’ an index – such as the FTSE 100 Index - aiming to mirror its ups and downs as closely as possible. These indices are a way of measuring the performance of a wide range of companies all at once: the FTSE 100 Index, for example, includes the 100 largest companies quoted on the London Stock Exchange.

An index fund is a ‘passive’ investment, which means that unlike an actively managed fund, there’s no fund manager making decisions about what the fund should invest in. Instead, investments are usually worked out by automated programmes designed to mimic the performance of the index - they may not buy every share in the index, but will certainly have significant holdings in the largest and therefore most influential companies. As a result the fees you pay are usually lower, because there are fewer costs for the investment manager.

Who are index-tracker funds for?

Index-tracker funds are a popular choice with investors who want the returns that stock market investments can potentially bring, but don’t necessarily want to spend time and effort monitoring the ups and downs of individual companies or researching markets. Many people use their stocks and shares ISA allowance to buy an index-tracker fund as part of a wider savings and investment plan.

An index-tracker can also be a convenient way of investing in a particular country or sector - for example, technology - without the need to research individual companies in depth.

Choosing your investments

Diversification is all about spreading your investments around so you’re less exposed to the risk of one investment failing or performing badly. Across your whole portfolio, this might mean investing in a range of different asset types - some bonds, some shares, and maybe some property too - and the right balance of these will change depending on your attitude to risk.

It’s also a good idea to diversify your investments within your share portfolio, and this is where index-trackers can help, offering a low-cost way to invest in a particular market, country or industry sector.

Following the whole market

If you choose an index-tracker fund that follows a wide-ranging index, such as the FTSE 100 Index or FTSE All-Share Index, the performance of your fund will be very close to the performance of the index you're tracking. You are less vulnerable to any under performance of individual companies, and the management costs of such a fund will usually be lower than those of an actively managed fund.

Investing in specialist areas

You can also choose to diversify by investing in several index-trackers, each covering a different market or sector.

Let’s imagine that you want to invest in the telecommunications sector. Researching the sector and trying to select the strongest companies that also make good value investments can be difficult and time-consuming. If instead you invest in an index-tracker that covers the telecommunications sector, you get diversification without the costs of actively managed, specialist funds.

Alternatively, you might decide that you want to invest in an overseas market. Buying a tracker fund that follows an index made up of companies in the US or Europe, for example, would be a cost-effective, relatively simple way of adding this to your portfolio.

Can I invest in index-tracker funds with my ISA allowance?

Absolutely. Most index-tracking funds (though not all of them) are available as an ISA.

Why invest with Legal & General?

  • We offer stocks and shares ISAs investing in a range of index-tracker funds, with indices following European, USA, Asia-Pacific and emerging markets, and sectors including pharmaceuticals, technology and more.
  • We are one of the UK’s largest index-tracker providers, managing £331.5 billion of index-tracking investments as at 30 June 2017.

Risks

  • Please remember the value of an investment and any income from it may fall as well as rise and is not guaranteed. You may get back less than you invest.
  • Although there is no fixed term, you should consider an ISA or unit trust investment to be medium to long term, ideally five years or more.
  • The value of property is generally a matter of valuer's opinion rather than fact.
  • The fund may invest overseas. Changes in exchange rates between currencies may cause the value of an investment and the level of any income to rise or fall.

All rights in the FTSE 100 Index, FTSE All Share Index, (the “Indices”) vest in FTSE International Limited (“FTSE”). “FTSE®” is a trade mark of the London Stock Exchange Group companies and is used by FTSE under licence.

The Indices are calculated by FTSE or its agent. FTSE and its licensors are not connected to and do not sponsor, advise, recommend, endorse or promote the Funds and do not accept any liability whatsoever to any person arising out of (a) the use of, reliance on or any error in the Indices or (b) investment in or operation of the Funds.

FTSE makes no claim, prediction, warranty or representation either as to the results to be obtained from the Funds or the suitability of the Indices for the purpose to which they are being put by Legal & General.


Comments
Send