Keeping in step with the Footsie

By LIZ PHILLIPS FOR MAILONLINE
Updated: 17:42 EST, 1 May 2009

The London stock market has seen double-digit growth in the past two months, leading to burgeoning interest in tracker funds.

Since early March the FTSE All Share has risen by 15 per cent while the largest 100 companies which make up the FTSE 100 have gone up by 13.76 per cent.

The traditional way to buy the index has been through unit trusts or Open-Ended Investment Companies, but another route is through exchange traded funds (ETFs).

Growth: The London stock market is starting to bite back

The main advantage of ETFs is that they are easy and cheap to buy.

They are traded like shares with investors able to buy and sell throughout the trading day.

With an ETF you know the buying and selling price, whereas with unit trusts you buy blind and only discover the precise price a day or two later.

With markets being so volatile investors could miss out on a sudden surge in their chosen index if they trade in tracker unit trusts.

There is no stamp duty to pay with ETFs, though there will be a stockbroker's fee.

Although most traditional tracker funds have no initial charge when you buy, they have an annual management fee. The second largest tracker, Virgin UK Index Tracking, has an annual charge of 1 per cent, but the majority have a fee of 0.5 per cent or less.

The underlying costs of an ETF work out at around 0.3 per cent to 0.4 per cent, which covers the cost of buying the individual stocks within the fund.

There are four main providers of ETFs in the UK - iShares (which is owned by Barclays but is up for sale), db x-trackers (Deutsche Bank), Lyxor (Soc-Gen) and ETF Securities, which mainly offers commodity funds.

The other three offer access to most leading stock market indices, but new exchange traded funds are continually being brought out.

In the past six months a further 75 have been launched making a total of 241 available.

Tracker funds, whether ETFs or unit trusts, do not replicate the stock market they are tracking exactly. It depends on how many of the company stocks they hold within an index.

The difference between how the market has performed and the fund is called the tracking error.