The Cheapest Index Trackers

Published in Investing Strategy on 28 April 2009

Index tracking is all about reducing your costs, so we've found you the cheapest on the market.

Picking shares is not easy, and according to some it's not worth the effort. Why? Because even if you do all your research, you are still competing against the rest of the market; unless you're privy to some inside information, in which case it would be illegal for you to trade, then the chances are that you will perform about as well as everyone else.

According to investment guru John Bogle, if you can't find the needle in the haystack, buy the whole haystack. But buying a fund is no easier -- again, fund managers are competing against the rest of the market and, on average, deliver average returns. Investors, however, pay them a fee to do better than that, and these fees eat into investors' returns.

Bogle's solution was to create funds that simply replicate the stock market index, so there are no expensive fund managers making decisions, and the fees are cut down to the bone, thus increasing investors' long-term profits. That's how the index tracker was born, and Motley Fool has always been a fan of this approach.

So if it's all about cost, what are the cheapest trackers you can buy to track the British markets? The answer depends on which index you want to track, and whether you prefer to buy unit trusts/OEICs, investment trusts, or exchange traded funds (ETFs).

FTSE 100

The FTSE 100 is the index that makes the headlines, and it consists of the hundred or so largest companies on the market. Its cheapest trackers are:

FundTotal expense ratioType of fundLump sum minimum (£)Monthly minimum (£)
Db x-trackers FTSE 100 ETF (XUKX)0.30%ETFn/an/a
Lyxor ETF FTSE 100 (L100)0.30%ETFn/an/a
Liontrust Top 1000.38%UT/OEIC2,500n/a
iShares FTSE 100 (LSE: ISF)0.40%ETFn/an/a
Prudential UK Index Tracker0.50%UT/OEIC50050

 

FTSE 250

Some people prefer to concentrate on mid-sized companies, i.e. the next 250 companies in order of size, and there are now a couple of funds covering covering that FTSE 250 Index:

FundTotal expense ratioType of fundLump sum minimum (£)Monthly minimum (£)
Db x-trackers FTSE 250 ETF (XMCX)0.35%ETFn/an/a
Lyxor ETF FTSE 250 (L250)0.35%ETFn/an/a

 

FTSE All-Share

But most trackers cover the FTSE All-Share Index, which accounts for about 98% of stock market value:

FundTotal expense ratioType of fundLump sum minimum (£)Monthly minimum (£)
Fidelity MoneyBuilder UK Index0.27%UT/OEIC50050
Edinburgh UK Tracker Trust (LSE: EUK)0.31%ITn/an/a
F&C FTSE All Share Tracker0.39%UT/OEIC1,00050
Db x-trackers FTSE All-Share ETF (XASX)0.40%ETFn/an/a
Lyxor ETF FTSE All-Share (LSE: LFAS)0.40%ETFn/an/a
M&G Group Index Tracker0.47%UT/OEIC50010

My cut-off point for these lists was a Total Expense Ratio of 0.5% per annum -- the TER is the total cost that you pay, including the obvious cost of the annual fee, in addition to the less obvious administration expenses paid out of the fund. You may be able to get better deals on some unit trust fees, depending on how you buy them.

Over the past year there have been no significant changes in TERs generally, but this may change when Vanguard, the tracker fund that Bogle founded, enters the British market later this year.

If your plan is to 'buy the haystack', then paying more than you have to would appear to defeat the purpose. Tracking errors tend to be small, but arguably shouldn't be ignored, especially with investment trusts which usually trade at a discount to net asset value. The discount is currently 3.2% in the case of this Edinburgh UK Tracker Trust, and investors stand to gain or lose through fluctuations in that figure.

You can buy ETFs and investment trusts for as little as £10 using The Motley Fool Sharedealing Service.

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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.

Luniversal 29 Apr 2009 , 10:35am

A 0.3% TER for a Footsie 100 tracker! Typically British "Treasure Island" daylight robbery by the Wise.

I also notice that only one iShares ETF appears in the Cheap List. No wonder Barclays got such a full price for that operation.

Hurry up, Mr Bogle-- hundreds of thousands of fleeced Limeys are praying for your safe arrival on these shores.

Fool1259721074 29 Apr 2009 , 8:09pm

Where is the results for US and Global indexs? As the UK is in a bad position compared to many countries because of debt, it would be better to invest outside the Uk.

DeafEars 29 Apr 2009 , 9:42pm

As for Vanguard it appears to be only - promises, promises.

alex1975 29 Apr 2009 , 10:11pm

The cheapest UK tracker is the HSBC all share tracker available exclusively through Hargreaves Lansdown www.h-l.co.k. TER = 0.25%

mikeg6 30 Apr 2009 , 8:49am

Does anyone know when an the index tracker TER actually apply, e.g. is it prorata on a daily basis or applied at certain discrete dates? If the latter, one could buy and sell the tracker to take advantage of pullbacks and avoid the charges!

AndyFD 30 Apr 2009 , 9:38am

The ETF options also pay dividend - do the UT/IT versions?

TMFTigger 30 Apr 2009 , 10:49am

Hi folks

Just to round up a few questions..

We did a piece on cheap non-UK trackers last year.
http://www.fool.co.uk/news/investing/2008/06/20/the-cheapest-foreign-index-trackers.aspx?terms=foreign+index+trackers

And a developed world ex-UK ETF was launched quite recently.
http://www.fool.co.uk/news/investing/investing-strategy/2009/04/21/the-rise-and-rise-of-etfs.aspx

UT/IT versions of index trackers do pay dividends.
http://www.fool.co.uk/news/investing/investing-strategy/2009/03/19/how-do-you-like-your-dividends.aspx

As far as I know, charges are made on a regular basis rather than on discrete dates.

And finally I spoke to Vanguard's PR company a week or two ago. They are still waiting for the FSA registration process to be completed and hope to launch a fund within a few months.

dom1907 01 May 2009 , 3:45pm

Hi, can anyone advise me on the best ISA tracker? I know costs vary and so, I believe, do the different funds in their quality of tracking. For example L&G's fund was in the bottom quarter I believe. How do we choose the best>

Thanks

Chibulaka 02 May 2009 , 9:11am

Hi knowledgeable people, I want to buy ETF trackers - tracking Indian and european markets. Can you guide me if i can get them in stock/shares ISA wrapper and is it available with Motley fool.
cheers

AndyFD 06 May 2009 , 1:13pm

@Chibulaka
Hi,
when I researched this about 18 months ago I chose Lyxor for the Indian market** (LNFT) also the other BRIC countries and UK, but couldn't do better than iShares for Europe.

** warning 1) down 1/3rd to date
2) last time I checked LNFT still hadn't paid a dividend!

AndyD 8-)#

Jaguar177 24 Jun 2009 , 8:09am

I want to get into buying iShares but live in the UAE though retain a house etc in the UK. Any advice as to the best way to buy these given that I cannot open a sharedealing account with Motley Fool due to my residential status.

parkie33 27 Aug 2009 , 12:02pm

A warning on the Lyxor All Share ETF mentioned in this article. I owned this ETF earlier this year at the ex-dividend date. I received the published dividend at this point int time but have just had 25% of the dividend amount taken back out of my Motley Fool sharedealing account. The letter I received from MF advising me of the reasons for this was vague so I called Motley Fool to query and they advised that because Lyxor is French the ETF dividends are liable for 25% French tax. I no longer have the holding but would not buy again for this reason. Does anyone know a solution for this?

capetownpeter 04 Jan 2010 , 9:16pm

How are charges levied? I would like to buy and sell long and short trackers and even trackers that go twice the change. Which are the cheapest?

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