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:
| Fund | Total expense ratio | Type of fund | Lump sum minimum (£) | Monthly minimum (£) |
|---|
| Db x-trackers FTSE 100 ETF (XUKX) | 0.30% | ETF | n/a | n/a |
| Lyxor ETF FTSE 100 (L100) | 0.30% | ETF | n/a | n/a |
| Liontrust Top 100 | 0.38% | UT/OEIC | 2,500 | n/a |
| iShares FTSE 100 (LSE: ISF) | 0.40% | ETF | n/a | n/a |
| Prudential UK Index Tracker | 0.50% | UT/OEIC | 500 | 50 |
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:
| Fund | Total expense ratio | Type of fund | Lump sum minimum (£) | Monthly minimum (£) |
|---|
| Db x-trackers FTSE 250 ETF (XMCX) | 0.35% | ETF | n/a | n/a |
| Lyxor ETF FTSE 250 (L250) | 0.35% | ETF | n/a | n/a |
FTSE All-Share
But most trackers cover the FTSE All-Share Index, which accounts for about 98% of stock market value:
| Fund | Total expense ratio | Type of fund | Lump sum minimum (£) | Monthly minimum (£) |
|---|
| Fidelity MoneyBuilder UK Index | 0.27% | UT/OEIC | 500 | 50 |
| Edinburgh UK Tracker Trust (LSE: EUK) | 0.31% | IT | n/a | n/a |
| F&C FTSE All Share Tracker | 0.39% | UT/OEIC | 1,000 | 50 |
| Db x-trackers FTSE All-Share ETF (XASX) | 0.40% | ETF | n/a | n/a |
| Lyxor ETF FTSE All-Share (LSE: LFAS) | 0.40% | ETF | n/a | n/a |
| M&G Group Index Tracker | 0.47% | UT/OEIC | 500 | 10 |
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.
