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MARKET COMMENT
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The Motley Fool loves low-cost investments as low costs are one of the best ways of ensuring higher returns. That's why we're big fans of investing in the stock market via an index tracker. In the UK, the average tracker charges around 0.8% a year. Among the cheapest are ISIS, at 0.4%, and Legal & General (a Fool partner), who charge 0.53%. If you're investing for the long term, these funds give you a big head start against the average managed fund, which charges around 1.5%. In the US, tracker investors fare much better. The Vanguard 500 Index Fund, which was the first tracker launched in August 1976, charges just 0.18% a year. It's cheaper because it's bigger. Currently it has assets of over £50b whereas most UK trackers have assets of significantly less than £1b. Legal & General is the largest in the UK (as far as I am aware) and has assets of £2.8b. So while L&G is a big fund in UK terms, it's only about a twentieth of the size of the Vanguard 500. However, in the US, Fidelity and E*Trade have recently started a small price war. Fidelity have dropped their charge to 0.1% while E*Trade charge just 0.09%. Wouldn't it good to have access to these sort of charges! The table below shows what would happen to an investment of £1,000 over twenty years, assuming stock market growth ran at an average of 8% a year.
Fund
Annual charge
Growth over 20 years
US tracker
0.1%
£4,575
UK tracker
0.5%
£4,248
UK managed fund
1.5%
£3,524
The tracker that charges just 0.1% a year would provide a final sum 30% higher than the managed fund. It would beat the 0.5% tracker by around 8%. As we said before, low costs equal higher returns.
All is not lost though. As index tracking grows in popularity here in the UK, as seems likely, you'd expect charges to drop. If you're investing for the long term, you'll benefit from this. And, if you're fortunate enough to have access to a company pension scheme, you may be able to get an ultra-cheap tracker through that. I've heard of one blue chip firm that offers a tracker charging just 0.07%!
Find out more about trackers here.