Index trackers are the simplest way to invest in the stock market. Here we list the ten cheapest on the UK market.
The Fool has been a fan of index trackers since it began in 1997. For the uninitiated they are investment funds which attempt the match the stock market's overall rate of return. They do this without the aid of expensive fund managers making them cheaper and hence, on average, more profitable to invest in.
Index trackers first came to the fore in the US in the 1970s. The first index tracker, the Vanguard 500 Index Fund, is still going strong over there. It's returned over 11% per annum since it was launched and now has assets of over £30bn.
Here in the UK, trackers took a little longer to catch on. The L&G UK Index Fund, now the largest UK tracker fund with over £4bn in assets, was launched in 1992. Virgin's index tracker, another popular fund with over £2bn of assets, came into being in 1995.
Who's the cheapest?
Despite the lacklustre performance of the stock market over the last decade or so, index trackers have remained popular with investors. They've gradually become cheaper too. Here's our list of the cheapest index trackers following the UK stock market.
Fund | Total
expense
ratio | Type of
fund | Index | Lump sum
minimum | Monthly minimum |
|---|
Fidelity
Moneybuilder
|
0.27%
|
UT/OEIC
|
A/S
|
500
|
50
|
Deutsche Bank FTSE 100
|
0.30%
|
ETF
|
100
|
N/a
|
N/a
|
Lyxor FTSE 100
|
0.30%
|
ETF
|
100
|
N/a
|
N/a
|
Edinburgh UK Tracker Trust
|
0.33%
|
IT
|
A/S
|
250
|
100
|
F&C FTSE All Share Tracker
|
0.35%
|
UT/OEIC
|
A/S
|
1,000
|
50
|
Liontrust
Top 100
|
0.36%
|
UT/OEIC
|
100
|
2,500
|
N/a
|
iShare FTSE 100
|
0.40%
|
ETF
|
100
|
N/a
|
N/a
|
M&G Index Tracker
|
0.46%
|
UT/OEIC
|
A/S
|
500
|
10
|
L&G UK Index
|
0.51%
|
UT/OEIC
|
A/S
|
500
|
50
|
Prudential UK Index Tracker
|
0.51%
|
UT/OEIC
|
100
|
500
|
50
|
Some of terminology in the table probably needs explaining. The total expense ratio of a fund is all the costs borne by you as an investor. It includes the headline annual management charge plus other administration fees.
For index trackers, the lower the total expense ratio the better. Unfortunately, a lot of the money we have invested in index trackers here in the UK is in relatively expensive funds, the average total expense ratio being 1%. There are even a few index trackers that charge 1.5% a year, the same as an ordinary managed fund. While an extra 1% a year may not sound a lot, if you have thousands of pounds invested over the course of a few decades, it soon becomes a substantial sum. If you have a high-cost tracker, ditch it for one that's easier on the wallet.
The type of fund shows whether the tracker is a unit trust or OEIC, an investment trust or an exchange traded fund. The first is bought through a fund manager or IFA, the latter two using a stock broker or online broker (so you will have to pay a charge of around £10 or more when you buy or sell them). This makes investment trusts and ETFs more suitable for lump sum investments. If you want to invest a small amount each month then a unit trust or OEIC index tracker will work out cheaper.
The rise and rise of ETFs
Exchange traded funds are a relatively new type of investment vehicle. They were first launched in the UK in 2000 and got off to a very slow start. Three years later only four different ETFs were available. However, the last two years has seen their numbers swell from 30 to over 140 with ETFs being launched that track all major international markets, gilts, corporate bonds and even commodities such as gold and oil. iShares is the market leader and four of its funds now have assets of over £1bn.
ETFs tend to be a lot cheaper than normal investment funds and you don't have to pay stamp duty when you buy them either. Although they've helped to bring down the cost of index trackers here in the UK, the charges we pay remain expensive relative to the US. We hope that, as ETFs become more popular and grow further in size, we'll see the cost of tracking fall even lower.
The index column shows whether the fund tracks the FTSE 100 or the FTSE All Share. The latter is the best measure of the UK market, comprising of nearly 700 companies and 98% of the market's total value. The FTSE 100 index is the better known of the two. Although it only consists of the largest 100 companies it still covers around 80% of the market's total value.
The two minimum columns show how much you need to invest either as a one off or on a monthly basis via an investment plan offered by the fund manager. This doesn't apply to ETFs although some brokers do offer low-cost regular investment plans. (You could do this via Motley Fool Sharebuilder.)
Finally, a couple of notes on how I constructed this table. Both Deutsche Bank and Lyxor also offer an All Share tracker which charges 0.4% a year, but I've ignored these to provide a broader range of companies.
Also, HSBC's index tracker is available through Hargreaves Lansdown at a special rate of 0.25% a year. This is technically the cheapest UK tracker although it's not been stated how long this special rate will continue (the standard charge for this fund is 0.56% a year). If you know of any funds I've missed please add a note in the comments section below.
For more on index trackers see our ISA centre and if you're looking for a share dealing account to trade ETFs take a look at our Sharedealing service.
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