Which Are The Cheapest Index Trackers?

Published in Investing on 3 November 2011

A round-up of low-cost trackers unearths some new names.

Here at The Motley Fool, we're big fans of low-cost index trackers and index-tracking ETFs. Cheap, diversified, easily bought and sold: no wonder so many of us rely on trackers as a key plank of our investment strategy.

In short, if there's a better way to acquire broadly-based exposure to stock market returns, we'd like to hear about it.

Better still, most providers and investment platforms make it easy to use trackers for regular savings -- dripping money into them month after month, thereby capturing the benefits of pound-cost averaging as well.

And especially in times of market turmoil, the charms of the index tracker or index-tracking ETF come into their own.

For years, for instance, I've taken advantage of periods of market turbulence to throw extra money at my tracker investments, secure in the knowledge that when the market goes up, my tracker investments will climb commensurately, too.

New entrants

But the tracker market isn't static. As with mortgages, credit cards and savings accounts, the 'Best Buy' providers come and go, as competition relentlessly drives down costs and fees. And that's especially so where competition is toughest, in the FTSE 100 and FTSE All-Share tracker markets.

Ten years ago, for instance, FTSE tracker products from providers such as Virgin and Legal & General (LSE: LGEN) ruled the roost. These days, other names top the league tables -- although Virgin and L&G products still offer good value in certain niche sectors.

In the last couple of years, for instance, Vanguard has entered the UK market. Since arriving in the UK in 2009, the mutually‑owned American firm set up by investing legend Jack Bogle has attracted quite a number of new customers -- building-up, from a starting point of zero, some £2 billion in assets under management.

HSBC (LSE: HSBA), too, has made a splash, famously dropping tracker prices across its entire range, and also launching a number of low-cost index-tracking ETFs, as well.

All of which means that it's probably time for one of our periodic trawls of the tracker marketplace. In short, which providers offer the lowest-cost products today?

So I've done some digging, and uncovered the five cheapest providers in each of the FTSE 100 and FTSE All-Share tracker markets.

FTSE 100

Let's start with FTSE 100 index tracking funds, where I looked for UK-domiciled trackers, available as accumulation units, and which didn't charge an upfront initial commission.

I've listed below the five cheapest FTSE 100 trackers that I found. All the quoted TERs have been checked against the provider's documents, or Trustnet, or both.

FTSE 100 Index TrackerTotal Expense
Ratio (TER)
HSBC FTSE 100 Index0.27%
Santander Stockmarket 100 Tracker Growth0.35%
Liontrust Top 100 Fund0.42%
Prudential UK Index Tracker0.50%
Legal & General UK 100 Index0.81%

Certainly, it's a list that includes a name or two that I hadn't expected to feature, such as Prudential (LSE: PRU) and Santander. And from what I could see, the number of providers offering outright 'Bad Buys' -- sky-high TERs and upfront charges -- has fallen sharply.

FTSE All-Share Trackers

Let's now turn our attention to FTSE All-Share trackers. Here, the range is broader, and the costs often lower.

That shouldn't be a surprise, of course, because there's no need for the tracker provider to buy and sell the underlying shares when the composition of the FTSE 100 index changes, as it does every quarter.

In short, a FTSE All-Share tracker is more of a 'buy and hold' affair, as well as one that is marginally less exposed to overseas-based resources giants and banks. For the savvy tracker investor, then, there's an argument for going for a low-cost FTSE All-Share tracker as opposed to a FTSE 100 tracker.

Once again, I've restricted my search to UK-domiciled providers with no upfront initial charge, and listed the five 'Best Buys' I could spot. As before, I've gone for 'accumulation' units, and the quoted TERs have been checked against Trustnet, or providers' own documentation, or both.

FTSE All-Share Index TrackerTotal Expense
Ratio (TER)
Vanguard FTSE UK Equity Index0.15%
HSBC FTSE All Share Index0.27%
Fidelity Moneybuilder UK Index0.30%
F&C FTSE All Share Tracker0.40%
M&G Index Tracker0.46%

Compared to a few years back, it's a list with some surprising omissions. No L&G Index Trust, for instance -- still, I believe, the UK's largest index tracker, despite its 0.56% TER.

"In terms of new money, people are coming to us and Vanguard first," explained HSBC's head of trackers Andy Clark when I spoke to him last week. "But in terms of existing tracker investments, many people don't really know what they're paying -- and until investors start voting with their feet, there's little incentive for such providers to start cutting costs."

Foolish Bottom line

Clearly, Vanguard and HSBC have benefited from badging themselves as low-cost providers. As noted above, Vanguard has captured £2 billion in new business, and since dropping its charges, HSBC has seen its tracker funds under management double, from less than £1 billion to over £2 billion.

And in contrast to the larger sums often invested by Vanguard clients, a surprising amount of that inflow to HSBC is retail savings plans, adds Mr Clark: regular investments of £20-£100 per month, a mode of investment where he believes that HSBC has the edge.

That said, regular saving into Vanguard products through platforms such as Alliance Trust Savings certainly is possible, as many Fool readers know. And as more platforms carry Vanguard products, regular saving into them will feature more strongly.

But of course, FTSE 100 and FTSE All-Share index trackers aren't the only route to tracker investing. So in a follow-up article, I'll look at today's low-cost index-tracking ETFs and some international trackers.

In the meantime, if you've invested in some of these less well-known trackers -- such as the F&C, Prudential or Santander offerings, for instance -- then please share your experiences in the box below.

> Malcolm and his delightful wife Mandy hold index trackers from HSBC, Vanguard and Legal & General.

> Worried about the state of the stock market right now? Then get The Motley Fool's latest free guide - What To Do When The Market Crashes

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Comments

The opinions expressed here are those of the individual writers and are not representative of The Motley Fool. If you spot any comments that are unsuitable hit the flag to alert our moderators.

MunroMan 03 Nov 2011 , 7:33pm

And which have the lowest volatility?

15551 03 Nov 2011 , 7:40pm

Good post. I think it would be helpful if you could include information about dividends because this can drastically change the figures. I once managed to find information on the HSBC FTSE 100 dividend yield, but it was extremely difficult to find. The IShares FTSE 100 tracker (omitted from the above list) is extremely open and transparent about its dividend. Although it's TER of 0.4% is slightly higher than HSBC's TER of 0.27%, IShares dividend was also higher by approximately 0.5%. On that basis the IShares tracker would appear better value and more liquid too. By the way I don't hold any trackers, I'm just trying to find the best one.

15551 03 Nov 2011 , 7:49pm

I found this on another Fool discussion board.

"For the very small investor the Vanguard UK index Tracker story is all hype. As soon as you look into it in detail the intermediaries (platforms) also take their annual management charges and dealing fees (well Alliance Trust might be better than Investor Profile), so this breath of fresh air is not at all what it seems (unless you have £100,000 to invest direct)."

MunroMan 03 Nov 2011 , 11:31pm

TER is important but it is not the only measure to be taken into account. As the last comment mentioned things like size, are also key. Other factors to be considered are standard deviation, tracking error, information ratio, yield, PTR and TCO

MDW1954 03 Nov 2011 , 11:52pm

Hello 15551,

The iShares product you mention was omitted because it was an ETF. As I said, the next article will cover ETFs.

Be very careful of quoted dividend statistics. The periods under comparison can vary wildly.

Malcolm (author)

MDW1954 03 Nov 2011 , 11:58pm

Hello 15551,

As of tonight's closing prices, my tracker investments with Vanguard exceed £55K.

I'm satisfied -- to quote your words -- that it isn't all hype.

As we've said many times, you don't need £100,000 to invest in Vanguard.

Malcolm (author)

Chorlton1 04 Nov 2011 , 8:44am

Would it be possible to see some real world figures over a period showing the amount invested each month in the selected tracker and how it performed? Currently I have dipped my toe into the market but I have no way of knowing how good or bad I have done as I have no experience of dealing with stocks and shares.

VinoDiony 04 Nov 2011 , 9:49am

A fine article on index-trackers after a long time! Good work MDW54!

A couple of points though...I don’t believe league tables make much sense especially when it comes to TER comparison. Why should I invest in Santander @ 0.35% when I can go for HSBC @ 0.27% TER? Ofcourse Vanguard is the exception here as I don’t have the £100k required for a direct investment with them. I had L&G trackers @ 0.55% for a long time before switching to HSBC when their low cost products came about a couple of years back.

A better plan is what I call a “Core-Mantle-Crust” portfolio strategy. The CMC strategy is where your core investment is the engine of growth and keeps your portfolio chugging along – so about 50% in HSBC FTAS for example. The mantle is where you invest in a slightly higher risk product expecting a slightly higher reward – about 40% in a HSBC FTSE250 index tracker for example. Finally the crust of your portfolio is the highest risk element where you gamble by selecting individual shares, actively managed funds (like the FCSS Malcolm...! :-) and other such gambits that can bring you phenomenal gains – but if you lose money here then it is only 10% of your portfolio which is at risk.

This is what I believe and this is what I have done for the past decade – only time will tell whether it has been a wise move or I have indeed been a fool with a small F! :-)

DonaldTramp 04 Nov 2011 , 10:20am

Thanks MDW for the article.
For all the questions about needing 100K to invest direct into Vanguard, you don't. You can access the tracker through Alliance trust savings (and their ISAs) without needing anywhere near 100K.
Looking forward to the international tracker article MDW. Any idea when you are gonna aim to publish?

MDW1954 04 Nov 2011 , 10:29am

VinoDiony,

You don't need £100,000 to invest in Vanguard. From memory, I think you need just £1,000 with Alliance Trust, although it could be less. Bestinvest have just starting carrying Vanguard, too, although their charging proposition will require careful studying.

I too have a core of FTSE All-Share, with FTSE 250, Asia Pacific, S&P 500 as "side holdings". All on decent TERs, of course!

Malcolm (author)

GoldenSoldier 04 Nov 2011 , 12:58pm

MDW

You did not say so explicitly, but I assume that when you throw in extra money during periods of market turbulence, you throw in this money only on the dips. In this way one does better than pound cost averaging.

MDW1954 04 Nov 2011 , 1:02pm

GoldenSoldier,

That's right.

Malcolm

15551 04 Nov 2011 , 1:11pm

MDW,

"The iShares product you mention was omitted because it was an ETF. As I said, the next article will cover ETFs."

Great stuff, look forward to it.

One thing I would say is that with standard trackers (not ETF trackers) you usually have to pay administration fees as well as other add-ons. With the Vanguard FTSE UK Equity Index you pay 0.15% p.a. However, Alliance Savings Trust charge a £30 admin charge (including VAT) so if you have a small holding of £1,000 this admin charge plus Vanguards TER equates to a total TER of 3.15%.

If you had a holding of £5,000 of the Vanguard FTSE UK Equity Index the total real TER including all admin fees etc would come to 0.75% p/a.
Workings are below.

0.15% of £5,000 = £7.50
+ 30 admin fee = £37.50.
£37.50 is 0.75% of £5,000
Total TER on £5,000 = 0.75%

The more units you hold the cheaper it gets.

15551 04 Nov 2011 , 1:21pm

You need £100,000 to invest directly with Vanguard unless you go through Alliance Savings Trust or another provider who'll take their slice.

drwardle23 04 Nov 2011 , 1:25pm

Hi,
From doing some reading around, it seems there is a considerable following for 'passive investing', ie trackers,

I found the web site below (not wanting to detract from the Fools articles!) very interesting. It gives examples of balanced portfolios that give very good exposure to several markets, all within trackers funds - hence low cost!

Cheers.

Steve.

http://monevator.com/2011/01/06/passive-investing-model-portfolio/

MunroMan 04 Nov 2011 , 1:47pm

This table shows the net returns of a collection of passive funds and the relevant UK indices since the end of 2009. as of this morning.

This does not include any platform fees where they might apply.

It certainly suggests that TER is not the only factor to look at.

FTSE UK Series FTSE 250 NTR 21.65%
VANGUARD UK EQUITY INC IDX-A 19.83%
LYXOR ETF FTSE 250 19.55%
DB X-TRACKERS FTSE 250 ETF 15.15%
FTSE 250 INDEX 14.54%
HSBC FTSE 250 INDEX-INC 14.44%
DIMENSIONAL UK CORE EQTY-ACC 13.30%
FTSE UK Series FTSE 350 TR 13.22%
FTSE UK Series FTSE All Share 13.14%
ROYAL LONDON-ALL SHARE TR-A 13.00%
ROYAL LONDON-FTSE 350-A ACC 12.93%
BCIF-UK EQUITY TRACKER-D ACC 12.87%
SW-UK ALL SHARE TRACK-I ACC 12.28%
HSBC ALL-SHARE INDEX-ACC 12.19%
LYXOR ETF FTSE 100 12.10%
LYXOR ETF FTSE ALL-SHARE 11.99%
FTSE UK Series FTSE 350 Higher 11.79%
PRUDENTIAL UK IND TR-A ACC 11.63%
LEGAL&GENERAL UK INDX-R-ACC 11.01%
HALIFAX UK FT ALL-SHR-C-INC 10.29%
HENDERSON UK TRACKER-A ACC 9.83%
FTSE UK Series FTSE Small Cap 9.78%
DIMENSIONAL UK VALUE FD-ACC 9.37%
HALIFAX UK FT 100 IND-C-INC 8.77%
VANGUARD UK EQUITY INDEX-I 8.70%
S&W MUNRO UK FUND-X ACC 8.11%
F&C FTSE ALL-SHARE TR-4-INC 7.87%
AXA UK TRACKER-R-INC 6.95%
M&G INDEX TRACKER-£-A-INC 6.90%
HSBC FTSE 100 INDEX-INC 6.65%
VIRGIN UK INDEX TRACKING-INC 6.54%
FTSE 350 INDEX 5.53%
FTSE ALL-SHARE INDEX 5.51%
SW-UK TRACKER FUND-B INC 5.46%
DB X-TRACKERS FTSE ALL SHAR 5.22%
LIONTRUST TOP 100 FUND-INC 5.16%
EDINBURGH UK TRACKER TRUST 4.42%
FTSE 100 INDEX 4.31%
FTSE SMALLCAP INDEX 4.26%
DB X-TRACKERS FTSE 100 ETF 3.19%
POWERSHARES FTSE RAFI UK 2.76%
ISHARES FTSE UK DIVIDEND PL 1.69%

Trustworthyfool 04 Nov 2011 , 2:50pm

I structure my investments currently with a bias to income (or income/growth), as I like businesses that can spin off cash to shareholders have to manage its cash carefully as well as p/l and balance sheet. So trackers that plough back (accumulate) dividend would be of interest to me.

However, I'm not clear if you can (or need to?) evaluated the share price tracking accurancy from the dividend performance of trackers (which presumably creates a compound interest type of effect ploughed back into the tracker performance). Can you enlighten please? I would also like to know how to identify the asset basis of the tracker - ie physical asset based or synthetic/derivative based?

I like the core mantle crust analogy, and would see a cost effective, non-synthetic, dividend reinvesting tracker as a core investment for me if purchased in the dips.

MDW1954 04 Nov 2011 , 2:57pm

15551,

You need £100,000 to invest directly with Vanguard unless you go through Alliance Savings Trust or another provider who'll take their slice.

Actually, Alliance [b][i] don't[/b][/i] take a slice, as Vanguard don't pay trail commission. You pay the Vanguard TER, and any relevant ISA or SIPP fee to Alliance. But that ISA or SIPP fee is the same whether you've Vanguard or another provider's tracker in your iSA or SIPP.

I can't speak for other platforms, having no experience of Vanguard on their platforms.

Malcolm

MDW1954 04 Nov 2011 , 3:01pm

LordEssex,

Maybe so, but the correlation with TER is still very high. Spearman Rank Coefficient, anyone?

Malcolm

15551 04 Nov 2011 , 5:43pm

Malcolm,

When I refer to Alliance taking their slice, I meant their admin fee - not a trail commission, sorry I wasn't clear on that one. It's certainly an interesting topic. I very much look forward to your post on ETF trackers too.

TomJefs 05 Nov 2011 , 10:17pm

With ETFs I can sell quickly at the price I see my investment at ie liquid and acts like a share. Can you explain if I can efficiently sell a Tracker at a given price in such a volatile market as now? I would not want to lose capital while my investment gets sold.

Tom

TomJefs 05 Nov 2011 , 10:29pm

.....From above I bought HSbC FTSE 250 Tracker a few months ago because of the low 0.27% TER from Hargreaves. I wanted to sell at precisely at a 500 quid gain last week. With an ETF I am confident of the execution price but with the Tracker I'm hesitant I will get exactly what my investment is valued at during the selling process while the euro volatility continues.

Should I have paid more for the HSbC FTSE 250 ETF instead?

MDW1954 06 Nov 2011 , 11:09am

Hello TomJefs

For trading in and out of the index, I'd use ETFs.

Bear in mind the dealing fees, though. On the Hargreaves platform, buying and selling the index as a tracker is free; buying (and selling) the index as an ETF carries dealing charges.

And a spread, too, unlike the tracker. But at least you know the price you're going to get.

Malcolm

TomJefs 06 Nov 2011 , 9:08pm

Cheers Malcolm. :) Curious, do you use both strategies for short and long investments?

bannerbruce 07 Nov 2011 , 4:46pm

I use iii.co.uk (Interactive Investor) and I am quite confused as to what to buy. When I search for 'vanguard ftse uk', I get:

Vanguard FTSE UK Eq Idx A (FUND:FPC5)
Vanguard FTSE UK Eq Idx I (FUND:FPC6)
Vanguard FTSE UK Eq Inc Idx A (FUND:FPC7)
Vanguard FTSE UK Eq Inc Idx I (FUND:FPC8)

Which one do I buy?

Thanks

elephant888 07 Nov 2011 , 9:33pm

bannerbruce:

'A' stands for accumulative which means dividends are reinvested.
'I' stands for income which means that dividends are paid out (into your cash account).
Eq Inc Idx stands for Equity Income Index which means it tracks shares from the FTSE with higher than average income.

Which one do I buy? The choice is yours. Probably accumulative if you want to buy and hold long term as you won't have to manually reinvest income. Probably 'Eq Idx' if you want to track the broader FTSE index.

paspatout 08 Nov 2011 , 8:34pm

I have an L&G All Share Tracker. I almost chopped it in recently when I discovered from a Fool feature on tracker costs that mine was languishing down the league table with TER of 1.15% p.a. However I was reminded just in time by letter from L&G that I receive a loyalty bonus each year which this year equates to around 0.7% of the fund value, which puts a different complexion on things.

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