Trackers and income?

[Peter1B1]

Hi. I expect there is a simple answer to this but I'm puzzled as to what happens to the 'income' from a tracker.

I can see how the capital gain or loss is continuously reflected in the tracker 'price', which I take to be a synthetic reflection of the behaviour of the underlying index which it is following.

But the constituents of that index, if separately held, would generate earnings for distribution (as dividends or interest), which would attach to the beneficial holder. I don't think the tracker necessarily 'owns' the assets that it tracks, so how is the holder of a tracker compensated for the income that those assets will have generated? It won't be in the tracker share price as that will continue only to track current asset values.

I'm happy enough with the idea of low-cost trackers for certain pf purposes; but are they participative in some way and if not, why not?

A puzzled Fool, Peter1B1

[Spet0789]

Most trackers are funds which ‘physically replicate’ the assets that comprise (or approximate) the index that they track. So they will receive in full the dividends or interest. They can then either pay the cash out as a periodic dividend (so called distributing funds) or use it to buy more of each share (accumulating). There are some funds which use derivatives to ‘synthetically replicate’ an index. In that case, depending on the details, either the dividends on the underlying shares or an expectation of the dividends will be paid to the fund under the terms of the swap. Again that may be paid out to investors or reinvested in the fund.

[nmdhqbc]

A randomly picked tracker fund linked below. You'll see the first link is the income (inc) units. If you scroll down to the "INCOME DETAILS" section you'll see info on when the income is paid etc. The second link is the accumulation (acc) units. It still shows the same income details but it's kind of irrelevant for acc units as the income just gets bundled up in the unit price. Each day the unit prices of the inc/acc will change by the same percentage but on the ex-dividend dates the acc unit will beat the inc unit by the dividend amount (% wise). Hence the acc units price is significantly higher from the income being paid out of the inc units.

https://www.hl.co.uk/funds/fund-discoun ... s-c-income
https://www.hl.co.uk/funds/fund-discoun ... cumulation

I find it easier to just get the inc units. The acc units make the tax returns more confusing. The income still needs to be treated as income even though it is bundled into the price making it feel like a capital gain.

[Alaric]

Hi. I expect there is a simple answer to this but I'm puzzled as to what happens to the 'income' from a tracker.

The simple answer is that a tracker can be just a fund managed by reference to a rule whereby it buys shares in proportion to their market value. As such income will arise from dividends which can either be distributed or reinvested.

If a fund doesn't invest directly in the stocks comprising an index, but instead buys options against future index performance, it is more complex.

[Peter1B1]

Thank you. The KIIDs for the trackers that I am interested in all show income as 'reinvested and reflected in the price of shares in the Fund', so I guess I take it as such. At least it gives some assurance that 'income' is just not grabbed on the side - which was my concern out of the tracker process.

The Risk Ratings at 5 and 6 (out of 7) are higher overall than I expected but allowing for the currency risk, specific geographies and full-fat equity indexes, I think that is the kind of exposure I am looking for over a thirty-year pension fund investment horizon. We will see: the profile can be adjusted over time. The Trackers will run alongside individually selected Investment Trusts in a SIPP so there will be opportunity to balance between the two.

Peter1B1