Fund Focus: the mistake tracker fund investors are making

Anyone who has spent a few years investing will likely have a mistake or two to learn from. It’s easy enough to pick a dud fund, get your fingers burned chasing the latest hot stock or horrifically mistime an investment, and it’s only through such errors that we really learn.

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With so many pitfalls to dodge, it makes sense that investors have continued to keep things simple by buying tracker funds. But many are making one apparent mistake that could cost them dearly in the longer run.

Backing the wrong horse

US and global equity markets have defied plenty of naysayers by continuing to produce strong returns, even in a challenging 2025. Those wanting to make good returns have understandably continued to invest here.

Our Top 50 Fund Index, which details the most popular funds among customers in a given quarter, shows that the Vanguard S&P 500 ETF USD Acc GBP (LSE:VUAG) and the Vanguard FTSE All-World ETF USD Acc GBP (LSE:VWRP) were among the bestsellers in the third quarter of 2025 alongside a handful of other global trackers.

But what looks like a common mistake from such investors has caught my eye.

Investors can opt for different share classes in open-ended and exchange-traded funds (ETFs), and these vary in important ways. Some open-ended fund share classes have different fees, meaning a little shopping around is required, while both ETFs and open-ended funds can offer currency-hedged share classes.

What’s also important to know is that share classes with an “accumulation” or “growth” label will reinvest any dividends received from your investment, while those in the “distribution” or “income” category will pay those dividends directly to you.

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It should make obvious sense for those using an income fund to pick a share class that will hand dividends directly to them, but if you use a fund for growth or don’t need the income right now it’s normally better to use a share class that reinvests them. Putting the money back in will help you to do an even better job of compounding returns over the long run.

The problem is that investors are making good use of the distribution share class on both the S&P 500 and FTSE All-World ETF mentioned above.

Our Top 50 Fund Index placed the distribution share class of the S&P 500 ETF in sixth place, just two places behind the accumulation share class of the same fund. The distribution share class of the FTSE All-World ETF sat in 13th place, a full seven places above its accumulation counterpart.

Those backing the distribution class will receive some modest payouts from these traditionally low-yielding funds, at the cost of even greater long-term performance. A switch to the growth option is worth considering.

Through a hedge backward

It’s worth noting that in some cases investors have to opt for a distribution share class to get what they want. That’s often the case when it comes to ETFs which hedge out currency movements.

Such products have done well in a 2025 marked by a weaker US dollar. To put it simply, if the dollar is worth fewer pounds then the returns from a US equity fund will be worth less to a UK investor. But hedging removes this risk, even if it would also miss out on the benefits of the dollar strengthening (and dollar returns being worth more in sterling).

To give an example of this, a currency hedged share class of an S&P 500 ETF, UBS Core S&P 500 ETF USD dis GBP (LSE:UC13), has returned around 18% over the 12 months to 8 January 2026, versus 8.7% for its unhedged equivalent. That’s a good result for those who have timed the hedge right.

But these hedged options often only come in a “distributing” format, meaning that once again you receive dividends rather than reinvesting them. That, in the long term, can be an expensive preference.

Shopping around

It’s finally worth remembering to shop around with share classes to get the cheapest one, and to know some of the basics. Often a share class dubbed “institutional” can be cheaper than its “retail” equivalent. And while the former sounds like something reserved for big investors, platforms such as interactive investor tend to be able to pass that access on to their customers.

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Ultimately, it’s a case of looking at all the share classes, deciding whether you would like to reinvest dividends or receive them, and then pick the cheapest share class available.

The difference between share class fees can at times be pretty hefty. To give an example of a once highly popular fund, Jupiter India I Acc charges 1% on its I accumulation share class, not cheap but perhaps acceptable for such a specialist portfolio. However, this fee looks positively cheap compared with the fee on the same fund’s L accumulation share class, which comes to a whopping 1.75%.

Share classes might seem like another headache for fund investors already overwhelmed by choice and information. But making the right choice, and the best price, should pay its own dividends in the long run.