UK - Investment in UK index tracking funds continues to grow, despite the setback in the UK market in recent months, according to research firm Standard & Poor’s.

S&P says the continued popularity of index trackers can be ascribed to a number of factors, but points out that one factor in their favour is that they avoid the chasing of fashionable sectors and stocks, with the associated risks and volatility that go with that.

James Tew, Standard & Poor’s head of european research, comments on the firm’s latest analysis: “Despite the general fall in the market reflected by the 7% fall in the FTSE All Share index over the year to 1st August, most index tracking funds that have qualified for our analysis have continued to grow, confirming their popularity with all types of investor, but especially the retail market. “

The S&P research continues its rating methodology introduced last year: that is, the assessment of each fund against three quantitative tests for – a narrow tracking error compared with its benchmark index; a low expense ratio and a competitive or nil price spread.

In its survey of 21 funds – 7 tracking the FTSE 100 index, 2 the FTSE 250 and 12 the FTSE All Share, Standard & Poor’s reports that the average tracking error (annualised over three years) measured against the respective benchmark index for each fund included both in this and last year’s analysis has declined from 0.50% to 0.35%. The range has also narrowed. Last year the maximum tracking error was over 1%.
This year the greatest is 0.75%. The smallest tracking variance is 0.14% compared with 0.18% in the 2000 report.

Total expense ratios, however, have increased marginally on a year ago, although there was a variance in the trend depending on the underlying index benchmark.