The FTSE 100 has jumped by 14% in a dramatic recovery since its post-Brexit dive on 24 June. But once again the cheap “index” funds have given investors the best returns, prompting many to conclude that paying a fund manager to look after your money just isn’t worth it when computers do it better.
Year in, year out, low-charge index funds have been beating their more expensive actively managed counterparts. Almost all the difference is down to the fact that index funds charge as little as 0.06% a year, while active funds charge at least 1%, and often a lot more once hidden fees are taken into account. After all, those Porsches and Ferraris have to be financed somehow.
On 24 June, Brexit result day, active funds fell 8%, but UK index funds were down just 6%. Since then the latter have maintained a 2% lead over the former. Over one year the average UK active fund is up 10.6%, but the typical UK index fund is up 17%. In the US, active funds are up 24.8% over the year, while Fidelity’s US index fund is up 31.2%. In Europe, active funds are up around 16.7%, but index funds are around 17%.
Index and tracker funds simply replicate the market, neither beating it or falling much behind. Like conventional funds, you are free to put them into a £15,240 tax-free Isa. But financial advisers have not been keen on them, as they paid little, if any, sales commission. Regulatory changes, however, are thankfully sweeping away some of the bias against index funds. Last week Hargreaves Lansdown, the UK’s biggest firm of financial advisers, added for the first time index funds to its Wealth 150 list of what it reckons are the best investments.
So how do you buy an index fund, who from, and which one to choose?
What to buy
Firstly, choose your index. There is a tracker for virtually every single index in the world – you can match the FTSE 100, the FTSE All Share or the S&P 500 on Wall Street, and so on. The big providers in the UK with trackers available to small investors are Vanguard, L&G, BlackRock, Fidelity and HSBC.
Which one you choose comes down to price, which vary according to which market you are tracking.
FTSE 100 trackers These match the performance of the 100 biggest shares on the London stock exchange. The BlackRock 100 UK Equity fund charges 0.07% of your assets every year. L&G’s UK 100 index fund is 0.1% a year, while the HSBC FTSE 100 Index fund is 0.18%.
FTSE All Share trackers These match the FTSE 100, but also include small- and medium-sized companies. BlackRock’s UK Equity Tracker costs 0.06%, while HSBC’s FTSE All Share Index is 0.07%. Fidelity’s Index UK costs 0.08% a year, but 0.06% if you buy directly from Fidelity.
UK Equity Income trackers An index fund can also match dividend payments from big shares on the London stock market. The Vanguard FTSE UK Equity Income Index fund currently pays dividends of 4.48% and charges 0.22% a year.
Do-it-all index funds Among the most popular trackers are ones that hold a mix of equity and bond trackers across the world. For example, Vanguard’s Life Strategy 40% Equity Fund contains 17 global sub-funds and charges 0.24%.
How to buy
You can’t ring up groups such as Vanguard and ask to invest £1,000 – their minimum for direct investors is £100,000. But you can invest how much you like via an investment platform, which buy and hold the index fund for you, send you statements, let you withdraw and add money and so on. Typically you will pay the price of the underlying fund, plus the cost of keeping it on the platform. The cheapest platform depends on how much you are investing and how frequently you trade.
Cheap for small sums Cavendish, Rplan and Axa Self Investor all stand out. CavendishOnline charges 0.25% a year, so with the cheapest of the index funds at 0.06%, an investor could pay as little as 0.31% for their money to be invested and managed. That’s just £3.10 for every £1,000 invested. Rplan and Axa Self Investor’s basic platform charge is 0.35%. AJ Bell YouInvest charges 0.25%, plus £1.50 for each transaction.
Cheap for bigger investors Percentage-based fees can be pricey if you have a large sum to invest, so consider paying a basic charge instead. For example, iWeb, part of the Lloyds group, charges £200 to open an account. After that it charges £5 per transaction when you buy and sell, with no annual platform charges on top. You will, of course, still have to pay the underlying fund fee (eg, 0.06% for the BlackRock Tracker). Alliance Trust Savings charges £7.50 a month, plus £12.50 per transaction, plus fund fee. The Share Centre charges a lower £4.80 a month plus a fund dealing fee of 1% (minimum £7.50) per transaction.
Cheap for advice If you don’t fancy picking funds yourself, there are online services that do it for you. Moneyfarm assesses your risk and creates you a portfolio of index funds. Underlying costs are 0.25%, but it charges nothing on the first £10,000. For £50,000 of investments, its fee is £240 a year. Nutmeg will build and manage a portfolio for you, and charges 0.3%-0.95%, and says underlying fund fees are 0.19%.
The big beasts Hargreaves Lansdown has nearly 40% of the market for small investors. Its fee is 0.45% a year plus the underlying fund fee. Its size means it has negotiated some cheaper underlying fund fees than its rivals – for example, it discounts the L&G UK Index fund from 0.1% to 0.06%. Fidelity is the other mega-platform and charges a 0.35% service fee.
