Perhaps the simplest way to use a Stocks and Shares ISA is to go for a tracker fund.
With the UK stock market returning around 7% per year on average over the long term, that could compound up very nicely.
We can buy a tracker as an exchange-traded fund (ETF). That’s a pooled fund, listed on the stock market itself. So we can buy and sell shares in it directly.
Boring big stocks
The FTSE 100 might seem like the obvious index to track, and I think it can be a great choice. It avoids the dangers of small-cap stocks, which can sometimes boom and bust rapidly.
But it also means we miss the growth opportunities that can come with smaller companies. So what about a FTSE 250 tracker?
That still keeps us away from the tiniest of firms. But it includes a nice mix of mid-cap growth and dividend stocks. And the FTSE 250 has beaten the FTSE 100 since launch.
The past decade
Let’s see how the iShares FTSE 250 ETF (LSE: MIDD) has gone.
In the past 10 years, it’s grown by 30%. That’s a bit below the FTSE 250’s 36%, but the fund has to levy charges, and there are usually small tracking errors too.
It’s still well above the 18% that the iShares Core FTSE 100 UCITS ETF, which tracks the FTSE 100, would have done. Oh, and it pays a dividend yield of around 3% on top of that. Over 10 years, that could double the return.
And looking back further shows where the smaller index really shines.
Longer-term returns
Since 2009, when the fund was launched, it’s up 199%. Over the same time, the FTSE 100 has managed just 80%. Even if FTSE 100 dividend yields were a bit better, it still shows the outperformance of smaller stocks.
A full £20k Stocks and Shares ISA allowance put into the iShares FTSE 250 tracker 10 years ago would be worth around £32,000 now with dividends included… even more if they were reinvested.
And since 2009, a £20k stake would have trebled, plus dividends added on top. No FTSE 100 tracker would have matched that.
Even better
But here’s where the fun really starts… what about tracking even smaller stocks?
The SPDR FTSE UK All Share ETF tracks the FTSE All-Share index, with all those little tiddlers. And in the past 10 years, it’s up 76%. It’s been riskier, though.
And since it was launched in 2012, the All-Share tracker has gained 128% compared to the FTSE 250 tracker’s 74%. The outperformance has come since the 2020 stock market crash, for a reason I have yet to uncover.
What next?
An index tracker can’t eliminate stock market risk. But it can help offset it by spreading it across hundreds of different stocks. Each investor must weigh up their own approach to risk, and a tracker adds a nice option.
And we don’t need to give up on choosing an individual strategy, with trackers available for a range of indexes.
