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The cheapest index trackers

Ed Bowsher
by Lovemoney Staff Ed Bowsher on 05 December 2012  |  Comments 8 comments

We look at the funds that offer the cheapest way to invest in the stock market.

The cheapest index trackers

At Lovemoney we’ve said many times that index trackers are the best way to invest in the stock market. You can read why in Six great reasons to choose an index tracker.

That said, not all tracker funds are equal. The charges for different tracker funds can vary widely.

So, to make life easier for you, I’ve done some research to find the UK’s cheapest index tracker funds.

Let’s start with funds that track the UK’s FTSE 100 index (‘Footsie’). Remember the Footsie comprises the 100 largest companies on the London stock market, so you’ll be investing in big household names such as HSBC, Vodafone and Tesco.  

Cheapest FTSE 100 index trackers

FTSE 100 Tracker

Total Expense Ratio (TER)

Comments

HSBC FTSE 100 index

0.27%

£2 monthly fee if you buy via Hargreaves Lansdown (HL)

Santander Stockmarket 100 Tracker Growth Unit Trust

0.35%

 

Liontrust FTSE 100 Tracker

0.46%

£2 monthly fee at HL

L&G UK 100 Index Trust

0.84%

£2 monthly fee at HL

Let’s say you invested £10,000 in the HSBC FTSE 100 index fund, and the Footsie index then rose by 10% over the following year. Your investment in the HSBC FTSE 100 fund should rise by roughly 10% minus charges of 0.27%. You’d also earn extra money on top of that gain from dividends.

With higher-charging tracker funds, you won’t do as well because you’ll have to pay more money to the fund management company.

Better than the Footsie

I’d normally expect a Footise tracker fund to deliver a pretty decent performance over ten years or longer, but I don’t think a Footsie tracker is the best option for most people. That’s because the Footsie index is rather concentrated. In other words, a large chunk of your money will end up in a small number of giant companies. That makes your investment riskier than it need be.

The ten largest companies in the Footsie comprise 45% of the index’s value, and more than 50% of the Footsie’s value is made up of companies that operate in just three sectors – Oil & Resources, Banking and Health.

If you want a bit more diversification, you could invest in the FTSE All-share index which comprises 602 companies rather than a hundred.

Here are the cheapest All-Share trackers:

Cheapest FTSE All-Share trackers

UK Tracker Fund

Total Expense Ratio (TER)

Comments

SWIP FTSE All Share Index

0.1%

You can only get this fund at 0.1% on the Hargreaves Lansdown (HL) platform. But you’ll have to pay a £2 monthly fee to HL.

Vanguard FTSE UK Index

0.15%

Can buy on HL, Bestinvest, Alliance Trust and Sippdeal. Have to pay 0.5% ‘dilution fee’ when you buy in. Also £2 monthly fee at HL

HSBC FTSE All Share

0.27%

£2 monthly fee at HL

Fidelity MoneyBuilder UK Index

0.3%

£2 monthly fee at HL

F&C All Share Tracker

0.43%

£2 monthly fee at HL

M&G Index Tracker

0.46%

£2 monthly fee at HL

Black Rock UK Equity Tracker

0.55%

No monthly fee at HL

Legal & General UK Index

0.56%

£2 monthly fee at HL

You’ll see that the SWIP FTSE All Share index fund is incredibly cheap at 0.1%. However, you can only get such a low rate if you buy the fund via the Hargreaves Lansdown investment platform. And Hargreaves Landown will unfortunately charge you a £2 monthly fee to hold this fund.

That £2 fee is very cheap if you’re able to make a fairly large investment in the fund. It’s equivalent to a 0.12% annual charge if you invest £20,000. But if you only invest £2,000, the equivalent percentage charge is 1.2%. Way too high!

Vanguard’s FTSE All-share tracker is also very cheap at 0.15% and you can buy it on several online investment platforms, not just Hargreaves Lansdown.

That said, Vanguard charges a one-off 0.5% ‘dilution fee’ when you first invest in the fund. If you think you might sell your investment quite quickly, don’t go for Vanguard.

In many ways, the HSBC FTSE All-Share funds and the Fidelity MoneyBuilder UK index funds are more attractive. They have low annual charges – 0.27% and 0.3% respectively – and there is no dilution fee.

More diversification

As I said earlier, the FTSE All-share index is more diverse than the Footsie, but it’s arguably still not diverse enough.

The ten largest companies in the index comprise 38% of the index’s value, and the 100 large companies – the Footsie - actually comprise 85% of the FTSE All-share’s value.

One solution to this lack of diversity to invest in the FTSE-250 index as well as the All-share index. The FTSE -250 index comprises the 250 largest companies on the London stock market after the 100 shares in the Footsie.

The great thing about the FTSE 250 index is that a lot of the companies are in different business areas from the Footsie giants, so buying a FTSE 250 tracker as well as an All-Share tracker really diversifies your portfolio.

I’m only aware of a couple of 250 tracker funds, but they’re both cheap and well worth considering.

Other UK trackers

Name of fund

TER

Comments

HSBC FTSE 250 Index Fund

0.27%

£2 monthly fee at HL

Black Rock Mid Cap UK Equity Tracker Fund

0.55%

No monthly fee at HL

ETFs and abroad

I’ve not had space in this article to look at ETFs (exchange traded funds) which are similar to index tracker funds and provide another cheap way to invest in the stock market. I’ll return to them on another day. The same goes for overseas index trackers – investing in foreign stock markets is another great way to diversify your portfolio.

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

More on index trackers and investing:

83% of managed funds are poor investments

The best argument against trackers

Index tracker sales jump

Six great reasons to choose an index tracker

A great way to invest

The secret to becoming rich

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Comments (8)

  • Ed Bowsher
    Love rating 80
    Ed Bowsher said

    Hi Geoff,

    Thank you for your kind comment. It's always good to hear from readers who like our articles.

    Ed

    Report on 03 January 2013  |  Love thisLove  0 loves
  • peterbraney
    Love rating 0
    peterbraney said

    I have read your article and the comments with great interest. I fall into the category of "semi-illiterate" potential investor to whom any charges are an anathema!

    I only want to invest a small amount (£100) for my grandson, who is 1 year old later this month, so that it can be added to periodically and accumulate over the next 17 years.

    I have been advised, through this website to go for a tracker or ETF as a "Bare" or "Simple" trust. I obviously don't want to be paying vast, or frequent fees on such a small amount, so can you say, with your vast experience and knowledge, whether any of the options stand out for my purposes?

    I must say that I find the variety of articles on the website to be of enormous interest and usefulness. Thank you.

    Report on 05 September 2013  |  Love thisLove  0 loves

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