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Top 10 index trackers

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Last updated on

15 February 2013

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Fancy taking the plunge into the stock market with an index tracker? Here's everything you need to know and some of the best.

Are you looking to boost your SIPP or invest in a stocks & shares ISA? At Lovemoney we reckon an index tracker should be your first port of call. Why? Because it’s a cheap and easy way to get exposure to shares without having to pick stocks yourself.

Index tracking is a very simple investment strategy which involves investing in all the companies quoted on a particular index with the aim of replicating how the index performs.

So, for example, if you put your money in a FTSE 100 index tracking fund, you would be investing in the all the top 100 companies on the London stock market. Your investment will then closely match the performance of that index. If the FTSE rose by 10%, your investment would step up by around 10% too. Of course, the reverse would also be true when the FTSE falls.

You can read more about why we like index tracker funds in Six great reasons to choose an index tracker.

Which tracker should you choose?

You can buy trackers which track indices in the UK and globally. I think first-time investors should consider investing in two tracker funds. One for the UK and one for the rest of the world.

For the UK, I'd recommend going for a fund that tracks the FTSE All-Share index. This index is an aggregation of the FTSE 100, FTSE 250 and FTSE Small Cap indices, and represents over 98% of the London stock market.

There are several funds available that track the FTSE All-Share index, so how do you pick the right fund for you?

Well, there are two factors to consider: the fund's charges and its 'tracking error.'

When you consider charges, the Total Expense Ratio (TER) is the best figure to look at. Sadly it doesn’t include all the costs for all funds, but it’s the most accurate figure that is easily obtainable.

Tracking error measures how closely the fund moves in line with its underlying index.

So let's say there are two funds that both track the FTSE All-Share index: Fund A and Fund B. Fund A's tracking error is -0.5% while Fund B's tracking error is -1%. That means Fund A grew by 0.5% less than the index while Fund B grew by 1% less.

You may be wondering why the performance of the two funds differ given that they're both tracking the same index. The difference will probably be explained by differences in the funds' 'tracking strategies.' Some funds buy all the companies in the underlying index while other funds will only buy a selection of the companies.

As a general rule, the funds with the lowest tracking error are the best, so Fund A is the one to go for – all other things being equal.

Now let's move away from our two imaginary funds and look at five real UK trackers that you could invest in today.

Top five FTSE All-Share index trackers

Index tracker fund

Index that is being tracked

Total expense ratio (TER)

Tracking error over 3 years

Comments

SWIP FTSE All Share Index (also known as SWIP Foundation Growth)

FTSE All Share index

0.1%

-1.6% over one year only

Fund hasn’t been operating for three years yet. Only available at 0.1% via Hargreaves Lansdown

Vanguard FTSE UK Index

FTSE All Share index

0.15%

-0.6%

HSBC FTSE All Share

FTSE All Share index

0.27%

-1.8%

Fidelity MoneyBuilder UK Index

FTSE All Share index

0.3%

-5%

F&C All Share Tracker

FTSE All Share index

0.43%

-2.3%

Source: Trustnet and fund websites

You'll notice that the SWIP fund has a very low TER at 0.1%. However, the tracking error is disappointing given that the figure is only for one year. You can't buy this fund on all platforms – it's only available at 0.1% via Hargreaves Lansdown.

The Vanguard fund has an impressively low TER and also has low tracking error. That said, you'll have to pay a one-off 0.5% 'dilution fee' when you put money into the fund.

So you may prefer to go for the HSBC FTSE All Share fund or the Fidelity MoneyBuilder UK Index fund. These are solid tracker funds and they will probably do well for you over the long term.

Global trackers

If you want a fund that tracks all global stock markets, you’ve got much less choice. You could either go for the Fidelity MoneyBuilder World Index fund or the Vanguard FTSE Developed World ex UK Equity Index Fund.

The main difference between the two funds is that the Fidelity fund includes UK shares – comprising about 8% of the fund – whereas the Vanguard excludes all shares listed on the UK market. Both funds charge 0.3% a year. The Fidelity fund only launched at the end of last year, so it’s really too early to compare tracking error.

Finally you may decide you want to track regional stock indices such as Europe or the US. For Europe, I like the HSBC European Index fund; your best bets for the US are the HSBC American Index fund and the Fidelity MoneyBuilder US Index fund.

Here’s a table with my five favourite non-UK index tracker funds:

Fund

Index that is being tracked

Total expense ratio (TER)

Fidelity MoneyBuilder World Index

MSCI World Index

0.3%

Vanguard FTSE Developed World ex UK Equity Index Fund

FTSE All World Developed Europe ex UK Index

0.3%

Fidelity MoneyBuilder US Index

S&P 500 index

0.3%

HSBC American Index

S&P 500 index

0.3%

HSBC European Index

FTSE Developed Europe ex UK Index

0.35%

Source: Trustnet and fund websites

So there you have it: five top trackers for the UK, and five top trackers for overseas investing.

This is a classic Lovemoney article that has been updated.

Compare index tracker ISAs

More on investment and index trackers

The cheapest index trackers

The cheapest global index trackers

83% of managed funds are poor investments

The best argument against trackers

A clever way to beat inflation

A new rival to Hargreaves Lansdown

Why women make better investors

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