Tracker Funds - Self Administered

On the Previous page we saw that it is quite possible that the tracker that you bought doesn't actually track in the way that you wanted.

Because of this creating and running your own tracker may appear attractive despite the time and costs needed to set it up and maintain it.

Self Administered - Is It Even Viable?

I would expect that nearly all private investors simply don't have enough money to buy a reasonable quantity of all the shares needed to run a viable tracker.

If you had £50,000 and decided to track the FTSE 100 that would be £500 worth of shares per company. Buying each company would incur dealing fees of around £10 per company (100 * £10 = £1,000) which is 2% of the investment and another 0.5% for stamp duty gives a total of £1,250 in costs.

If you were using a different investment strategy you would probably spend this £50,000 over say 10 companies which would incur dealing fees of around £10 per company (10 * £10 = £100) which is 0.2% of the investment, stamp duty is another 0.5 giving £350 in total.

The difference doesn't seem that great but being blasé about the odd thousand here and the odd thousand there is likely to lead to losses not gains.

Given all the work involved and fees incurred I am left thinking that the only reason to run your own tracker is that you want to track something that there is no product for.

This could be something recognised such as the FTSE AIM 100, the top 100 companies on the Alternative Investment Market or an index that you have created yourself.

Pseudo Trackers?

At first glance it may seem tempting to invent an index and track that, for example the top 20 shares in the FTSE 100 and FTSE 250.

Although this sounds attractive there is no readily available information to say that this makes any sense at all. So you would need to do a lot of research to see if the basis for your index has any merit.

In practice this example would mean buying companies on the way down as they fall out of the FTSE 100 and become big players in the FTSE 250 and selling companies on the way up as they are promoted from the top of the FTSE 250 to the bottom of the FTSE 100.

Another idea might be companies in the FTSE 100 with a low debt to earnings ratio, this sounds sensible, I like the security of the FTSE 100 but don't like XYZ as they have too much debt.

The trouble is that XYZ may be a big dividend payer, just moved into the FTSE 100 and are on the way up and most of their debt has been incurred buying their own premises so it can be argued that they don't really have any debt at all!