FOOL'S EYE VIEW
Choose Your Tracker Carefully

By Jane Mack (TMFJane)
March 13, 2003

As any Fool knows, the easiest way of investing in the stock market is to use an index tracker. They are comparatively simple to understand and usually, when it comes to charges, they're 'cheap as chips', to coin a phrase that seems to be doing the rounds at the moment.

However, there are some things to watch out for when buying an index tracker because some are not as cheap as they should be and may not perform as you'd expect.

The independent financial adviser firm, Chartwell, has just published the latest edition of its Tracker Fund Guide, which reveals that there are one or two shockingly poor index trackers on the market.

The sole aim of an index-tracking unit trust is to mimic a stock-market index. Whether it's the FTSE 100 or the FTSE All-Share, it doesn't make much difference, as they return similar rates over the long term. Their entire raison d'être is to be boringly average and the more boringly average they are, the better it is.

The last thing you want is an index tracker that gives you returns that are way above or way below the index, because it shows a high degree of error in following the average.

It's also important to have low management charges. Many trackers are effectively run by computer programs, so it's not as if there's a vast team of investment analysts who need paying to slave over hot company reports. There is, therefore, no excuse for tracker providers to charge vast sums to handle your money for you.

So, the three key things to watch out for when choosing a tracker are the initial and annual management charges and the company's ability to accurately track an index. It should go without saying that wrapping your tracker in an ISA to protect your returns from tax is also a good idea.

Let's look at two examples from Chartwell's new Guide, the first of which is stunningly bad value for money, in my view:

Sovereign FTSE 100 Tracker 
Initial charge                             2.5%
Annual charge                                1%
Minimum lump sum                        £2,000
Minimum monthly                            £50

% differential from index  
After 1 year                             - 2.5%
After 3 years                            - 4.6%
After 5 years                            - 8.2%

Now take a look at one of the better ones (yes, it happens to be the company advertising with us at the moment, but at least you'll get a chance to see why we like it so much):

Legal & General FTSE All-Share Tracker 
Initial charge                             nil
Annual charge                              0.5%
Minimum lump sum                          £500
Minimum monthly                            £25

% differential from index  
After 1 year                               0.4%
After 3 years                            - 0.3%
After 5 years                                0%

(I'd also point out that Sovereign charge you 0.5% if you remove some or all of your money, whereas Legal & General don't).

It's pretty shocking, isn't it?

I'm not sure I need to explain further, except to remind you that, as part of our Comic Relief effort, The Motley Fool is donating £5 for every index tracker which is taken out via our website on or before March 14.

More on Index Trackers and ISAs