Even the simple things in life are complicated.
Investing in trackers should be easy. Just choose your benchmark, find the cheapest index tracker and then simply buy and forget about it. This really is investing for Fools.
At least, that's what I thought.
The simple things in life are often far more complicated than you think, as I have discovered.
Track or trick?
FTSE 100 trackers looked cheap when they first appeared, but that wasn't always the case. Unless my memory is playing tricks, some even had a 5% initial charge.
A good number still have a pricey 1% annual management fee, notably Virgin UK Index Tracking and Marks & Spencer 100 Companies Fund. Henderson UK Tracker has a total expense ratio (TER) of 1.18%, while Halifax UK FTSE All Share Index Tracker has a lurid 1.5% annual fee.
Why pay those rip-off rates when there are plenty of great low-cost trackers out there? HSBC offers a good choice of unit trust trackers with a 0.27% TER. The Fidelity MoneyBuilder range charges around 0.3%. Vanguard charges 0.15%.
My iShares FTSE 100 tracker ETF originally looked cheap when I took it out, with a 0.5% annual fee, but it doesn't look that special today.
Even relatively small annual charges can make a big difference over 10 or 20 years, so I decided to switch elsewhere. But boy, did it turn out to be complicated.
I hold the iShares FTSE 100 ETF across two different share-dealing sites. One sits outside my tax-free ISA allowance (I took it out while resident overseas), an omission I want to rectify. Unfortunately, under HM Revenue & Customs regulations, I can't seamlessly convert it into an ISA. Instead, I will have to sell up and re-invest, which will trigger a capital gains tax (CGT) charge at 40%. I can't see any alternative but to bite the tax bullet, because the longer I leave it, the more CGT I will have to pay.
It's an important reminder, if you needed one, of the importance of using your ISA allowance whenever you can.
Here's a mistake I made only last week. I switched £4,500 sitting in my other iShares FTSE 100 ETF into the HSBC FTSE 100 Index tracker, via The Share Centre.
I opened this account years ago when I was investing just £500 a pop. At 1% per trade, the account charges made sense. They don't make sense when trading £4,500. The trade cost me a whopping £45. Motley Fool's own share-dealing service, for example, would have charged just £10 for the sale of the iShares ETF.
I can console myself that it will be worth it, over the long term. Paying 0.25% a year instead of 0.5% will give me an extra £115 over 10 years (after that commission) and £602 over 20 years, assuming 7% annual growth.
You can work out whether switching to a cheaper tracker makes sense by using an online compound interest calculator. First, key in your initial lump sum and any annual contribution.
Next, decide how longer you are investing for, assume an annual growth rate, then adjust that to reflect the fee charged. So if you assume your investments will grow 7% a year, and the fund has a 0.5% annual fee, you should key in 6.5%. Then calculate and compare your total return, with different fee levels.
That's what I do anyway. If you know a better method, let me know below.
The longer you are investing, the more sense it makes to chase a lower monthly fee.
You should also make sure your share-dealing tariff is the right one for your current trading patterns, and work out the exact cost before you click the button.
That platform fee
Having sold several high-charging, low-performing unit trusts, I hold £5,000 inside another stocks and shares ISA. I'm ready to feed the money into a tracker or two whenever the market dips this summer.
There is one problem. The ISA is with Hargreaves Lansdown (LSE: HL). That means I'm banging my head against its notorious £1 and £2 monthly platform fees (again). The Fool has covered this extensively, notably here and here.
I now have to work out whether it is cheaper to go for the low-cost Vanguard tracker offered by Hargreaves Lansdown and swallow that £2 monthly fee; BlackRock's range of unit trust trackers, which have a higher 0.55% annual charge but no platform fee; or switch platform altogether. Does investing have to be this difficult?
Trackers of my tears
These aren't the only issues to consider with trackers. Some make a surprisingly poor fist of doing what they claim to do on the tin, which is to accurately track their chosen index.
I'm not going into that today. Life is complex enough already.
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> Harvey Jones holds iShares FTSE 100 ETF, HSBC FTSE 100 Index and Fidelity MoneyBuilder UK Index. He doesn't hold Virgin UK Index Tracking, Marks & Spencer 100 Companies Fund, Henderson UK Tracker or any trackers by Vanguard or BlackRock. The Motley Fool owns shares in Hargreaves Lansdown.