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The cheapest global index trackers

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On 19 December 2012


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We look at the cheapest ways to invest in stock markets away from the UK.


Earlier this month I wrote an article called The cheapest index trackers which looked at the cheapest UK investment funds.

I wrote this because I passionately believe that any UK stock market investor should invest at least some of their portfolio in a UK index tracker fund. However, I think there’s a strong case for not putting all your money into the UK market.

That’s because the UK stock market is dominated by a relatively small number of companies that operate in a relatively small portion of the global economy. A large chunk of the UK market comprises companies in just four sectors – financials, resources, health and consumer goods.

Look at the ten largest companies in the UK’s All-Share Index:

Company

% of index

Market cap (£bn)

HSBC

6.69

117.4

BP

4.68

82.2

Vodafone

4.53

79.5

Royal Dutch Shell A

4.4

77.2

GlaxoSmithKline

3.75

65.7

British American Tobacco

3.63

63.6

Royal Dutch Shell B

3.25

57.0

Diageo

2.66

46.8

BHP Billiton

2.36

41.5

Rio Tinto

2.2

38.6

Total

38.15

669.5

These ten shares comprise 38% of the UK stock market by value. They're all global companies, operating in many countries around the world, but there are no technology companies, no retail chains, and no insurers. The London stock market is too concentrated in a small number of sectors.

Diversification

It makes sense to try and diversify away from these ten stock market giants, and one way to do that is by investing in stock markets outside the UK.

And the good news is that Fidelity has just launched a new fund that makes it particularly easy to invest globally. The new fund is called the Fidelity MoneyBuilder World Index Fund. It invests in 1,623 companies across stock markets in 24 developed countries including the UK.

The fund’s total expense ratio is 0.3% a year which is attractively low. The fund tracks the MSCI World Index, so if the MSCI World Index rises by 5% over a year, the Fidelity fund should also grow by roughly 5% – minus 0.3% in charges. Investors will also benefit from dividend payments.

Let’s look at the top ten consituents of the MSCI World Index:

Company

% of fund/index

Market cap ($ bns)

Apple

2.18

547.3

Exxon Mobil

1.64

412.2

General Electric

0.89

223.9

Nestle

0.86

216.1

Chevron

0.83

208.5

IBM

0.83

208.3

Microsoft

0.80

201.3

AT&T

0.80

200.1

Johnson & Johnson

0.76

191.4

Procter & Gamble

0.76

191.3

Total of top ten constituents

10.35

2600.4

It’s a very different picture to the equivalent list for the London market. There are three technology giants – Apple, IBM and Microsoft – as well as three big consumer businesses: Nestle, Johnson & Johnson, and Procter & Gamble.

But the biggest difference is that the ten largest companies only comprise 10% of the index’s total value, compared to 38% for the All-Share Index in London. So if you invest in a global fund, you’re immediately getting lots more diversification.

For the record, here are the ‘country weight’ numbers. In other words, you can see how much of the fund is invested in different stock markets around the world:

Country

% of fund

United States

53.04

United Kingdom

9.62

Japan

8.23

Canada

4.95

France

4.01

Other

20.15

Other funds

Fidelity’s fund isn’t the only global index tracker you could go for. Vanguard offers the FTSE Developed World ex UK Equity Index Fund.

Like the Fidelity fund, the total expense ratio is 0.3% a year, but you can only buy the Vanguard fund on four investment platforms – Hargreaves Lansdown, Alliance Trust Savings, Bestinvest and Sippdeal. (You’ll need a minimum deposit of £100,000 to invest directly with Vanguard.)

Unfortunately, Vanguard often charges a 0.5% ‘dilution fee’ when you invest, which means that the Fidelity World Index Fund may be the cheaper option. You’ll also have to pay a £2 monthly fee if you invest in either fund via the Hargreaves Lansdown platform.

As for the underlying investments in the funds, the big difference with the Vanguard fund is that it doesn’t include any UK shares.

Individual markets

If you’re looking to diversify away from the UK, global funds aren’t your only option. You could always invest in funds that are focused on a particular stock market, e.g the US or Japan.

Once again, there are plenty of index tracker funds that track individual overseas markets, especially the US.

Here are some of the best overseas index tracker funds for individual markets or regions:

Fund

Charges (TER)

Comments

Fidelity MoneyBuilder US Index

0.3%

Tracks the S&P 500 index

HSBC European Index

0.35%

Tracks FTSE Developed Europe ex UK index

HSBC Japan Index

0.33%

Tracks the FTSE World Japan index

HSBC American Index

0.3%

Tracks the S&P 500 index

Vanguard US Equity Index

0.2%

Tracks the S&P 500 index

Vanguard FTSE Developed Europe ex-UK

0.25%

Tracks FTSE Developed Europe ex UK index

Vanguard Japan Stock Index

0.3%

Tracks MSCI Japan Index.

You’ll have to pay a £2 monthly fee if you invest in any of the above funds via Hargreaves Lansdown.

So if you’re planning to invest some money in the stock market in 2013, it's worth considering the funds I’ve highlighted in this article. Investing globally can be a great way to help build a long-term nest egg for the future.

If you want to compare charges for both UK and US tracker funds, check out Fidelity’s clever ‘Compareyourtracker’ tool.

More on investing in the stock market

A clever way to beat inflation

The best way to boost your wealth

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More on index trackers

The cheapest index trackers

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Six great reasons to choose an index tracker

The best argument against trackers

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