Spread Betting or Use a Tracker Fund?

You have probably heard of tracker funds, also known as index funds. Often in the form of exchange traded funds (ETFs), but also can be mutual funds, they are funds that purport to track the movement of a particular index, such as the FTSE 100. If you invest in the fund, and the index goes up, then your investment should rise by the same percentage as the index. If the index goes down, then you lose the amount that it falls.

The index fund could be set up by buying shares in all the companies in the index, but in practice is usually not because of all the dealing costs this would entail. Instead, people called quantitative analysts (quants), who specialize in this work figure out the best way to invest and keep transaction costs down, while still shadowing the value of the index closely.

One of the arguments in favour of a tracker fund is that the operating expenses are low, and if you look at the figures many actively managed funds struggle to beat the overall market numbers, particularly after deducting the expenses for expert management.

Spread betting also allows you to trade on the value of indices, in addition to all the other financial securities offered, such as currencies, stocks, etc. You can bet on the index going up or down, making money if the market improves, or if it declines (as long as you bet in the right direction). Some index funds can match this, by offering a reverse index fund that loses value if the index rises and gains if the index drops. Not surprisingly these are sometimes called bear funds.

The range of tracker funds is so great, that you can also find funds which are designed to gain twice the index gains (or index losses for the bear funds). With up to 75% of mutual funds not beating their market index, this sounds like an attractive option.

The performance of these still can't touch using spread betting to profit from the markets ups and downs. While the funds require investment as if you were buying a selection of the shares making up the index, forexmasterlevels is much more cost effective by requiring your account to have a minimum amount in comparison to the index. As indices are particularly well traded, usually the margin, or the amount that you need in your account to open a bet, is relatively small; and the spread, which is the difference between the price you can buy and sell the index at and in practice is your spread betting provider's fee for running their business, is minimal.

Spread betting also provides the flexibility of naming your own price, whether £1 or £100, per point of the index movement, and your bets can be equally easily placed on the index going up or down, you don't have to open a different account to profit from the reverse. In terms of flexibility and ease of use, spread betting wins this contest hands down.