Tracker Fund

  

Categories: Mutual Funds

This isn’t a fund for stalkers, or an investment vehicle that puts money into bloodhound breeding. Instead, it’s a fund meant to track some stock index.

You want to invest in the S&P 500. Instead of buying shares in 500 companies (which would be very expensive) or buying an ETF based on the S&P 500 (which would be too easy, apparently), you decide to go with an S&P 500 tracking fund. It's meant to mimic the action in the S&P 500. If the index rises 1.3% on a given day, the fund climbs 1.3% as well. If the S&P dips 0.7%, your fund falls 0.7%.

The fund tracks the index wherever it goes. Which we guess makes it a little like a stalker...but not a particularly creepy kind.

As for the bloodhound breeding...you'll have to go somewhere else for that.

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And finance allah shmoop what's the difference between mutual funds

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and index funds The answer this guy or well this

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team what do they do They manage the mutual fund

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mutually together You know what nemo They make bets on

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apple and amazon in crotchless tuxedo pants Dot com will

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these bets or into teligent investments In the parlance of

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the industry our elements oven actively managed fund The mutual

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fund is active in that it buys and sells hoping

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to be smarter than the market and find areas you

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know where they're inefficiencies where investors are throwing out the

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baby with the bath water so that they buy the

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shares here a twelve bucks and hope to sell them

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if they hit thirty bucks in two years when the

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new products get released and people are going absolutely bonkers

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for self velcro ing neckties or whatever and index generally

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stands pat on the hand It's dealt throughout the course

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of the year making only small tweaks to invested amount

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so that the fund itself conforms to the structure or

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rules it set out when it was created But there

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are a few vital and insidious differences that should make

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investors today very wary about investing in mutual funds or

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any actively managed fund When mutual funds first became popular

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the investing marketplace was kind of the wild wild west

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that was the nineteen fifties and sixties and a savvy

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fund manager could beat the market by five and even

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twenty percent per year year over year It was kind

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of a golden age of mutual funds and money flowed

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into them But like all good things this market wrinkle

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easy winds and the investing world had to come to

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an end Why competition when there were only a few

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mutual funds out there and a few private investors it

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was relatively easy to identify baby bathwater things you know

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diamonds in the rough Today there are literally thousands of

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mutual funds With such massive competition performance relative to the

02:01

market has lagged dramatic In fact over a typical seven

02:05

to ten year holding period only a very small handful

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of mutual funds beat the typical index fund investing in

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the same or analogous areas of stocks or bonds It's

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like one in twenty ever really beat the market and

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it gets worse Mutual funds charge relatively large fees compared

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With index funds whereas a typical index fund might charge

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twenty basis points to manage your money that is twenty

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cents for every hundred bucks you have with them for

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year The analogous mutual fund My charge One percent or

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more that's five times surprise for demonstrably no better investment

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results and wait It gets even worse Mutual funds trade

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stocks and bonds and other securities index funds rarely trade

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or if they do it's a very small amount of

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trading around the margin keeping index in compliance with its

02:50

legal charter But many mutual funds have turn over the

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apple variety of like fifty eighty or even one hundred

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percent Turn over means that a fund has sold the

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stock to realize a taxable gain You know book a

03:04

profit by taking cash from selling the stock or to

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realize a loss sometimes as well we'll each time of

03:10

fund transact It pays a commission to our friendly excellent

03:14

golf skilled brokers but more painful to most investors is

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that in transacting the fund realizes taxable game So what

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does that mean Well here's the math If your mutual

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fund is up twelve percent given year when the market's

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up ten percent it would be an absolute top of

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the pyramid performance here For the fun of beating the

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market by two hundred basis points would likely mean that

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mutual fund was in the top forty right up there

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with rina's latest it single So what is that awesome

03:41

performance after tax for the mutual fund Well if the

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fund had traded like the typical one it would have

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had turnover of about sixty percent of its assets and

03:50

half of those sales would get ordinary income tax treatment

03:53

think high rates of something like forty percent with federal

03:56

and state taxes combined for most and long term gain

03:59

of twenty percent for the rest Well the wealthy pay

04:02

higher taxes so we're rounding down the numbers here even

04:04

being conservative So if half of the sixty percent or

04:07

thirty percent of the gain of twelve percent which is

04:09

around four percent his tax at forty percent then take

04:12

away one point six percent from the performance to get

04:14

an after tax net result number Then after another thirty

04:17

percent tax at the long term gain rate of twenty

04:20

percent you'd have take away another point six percent so

04:22

in total you'd have to subtract one point six plus

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point six or two point two percent from the twelve

04:27

percent humongous rock star year to net nine point eight

04:30

percent in after tax returns Nope not very exciting relative

04:34

to that index fund And yes there are differences here

04:37

even important ones But the bottom line is that if

04:39

a huge performance top two percent fun has results Not

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much better and or maybe worse than just a basic

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index funds Why does anyone invest in mutual funds anymore 00:04:49.487 --> [endTime] Well this guy

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