Recent research from Bestinvest showed that the most expensive FTSE All Share tracker is 10 times more expensive than the cheapest, which has a significant impact on returns – even in the medium-term.
Cost is arguably even more important for passive investors than for active ones. Many active funds have high charges to fulfil research costs, helping them to add value; in the passive world, however, there is only so much a manager can do to ensure they can replicate performance.
With this in mind, FE Trustnet highlights five cheap tracker funds for investors looking for direct exposure to developed markets this ISA season:
Vanguard FTSE UK Equity Index
This is the standout FTSE All Share tracker fund in terms of cost, performance and tracking error in recent years.
Vanguard FTSE UK Equity Index has an OCF [ongoing charges figure] – the new charges structure which is set to replace TER [total expense ratio] – of 0.15 per cent, making it the cheapest retail fund in the entire IMA UK All Companies sector.
FE data shows the £694m portfolio has returned 79.21 per cent since its launch in June 2009, falling short of the index by just 0.69 percentage points.
It has followed its benchmark with a tracking error of 0.76 per cent over the period. Of all the FTSE All Share trackers, only Aviva Inv UK Index has a lower tracking error, but its significantly higher TER of 0.93 per cent means that it has underperformed by a greater amount.
Performance of funds vs index since June 2009
Source: FE Analytics
Like all Vanguard funds, it uses full replication, which means that manager E. David Kirby actively owns every stock in the underlying index and reacts to daily changes in share prices.
The fund requires a high minimum investment – £100,000 – but this figure is significantly lower when investing through a platform such as Hargreaves Lansdown or Bestinvest. In both cases, the TER is unaffected, but Hargreaves charges an extra £2 a month on top.
HSBC FTSE 100 Index
For someone who wants pure blue chip exposure to the UK, the £565m HSBC FTSE 100 Index is a decent choice. This is the cheapest FTSE 100 tracker available to investors in the UK, and again uses a full replication process.
The fund has an OCF of 0.27 per cent. There is some talk of this figure being revised down further to 0.17 per cent, but this has yet to be confirmed.
Since costs have come down significantly in recent years, looking at long-term performance is a little misleading.
Over three years, however, it has performed well; according to FE data, it has delivered 26.79 per cent over this time, falling short of the FTSE 100 by 1.69 percentage points.
Santander Stockmarket 100 Tracker Growth is the only FTSE 100 tracker that has delivered more, but it is a touch more expensive and has a slightly higher tracking error.
HSBC FTSE 100 Index requires a minimum investment of £1,000 and is available on a host of platforms.
Fidelity MoneyBuilder US Index
This is the second-cheapest fund that tracks the S&P 500, behind Vanguard US Equity Index; however, Fidelity MoneyBuilder US Index requires a minimum investment of just £500, without going through a platform.
The vehicle has a TER of 0.3 per cent. It was only launched in November 2012 and so has little track record to speak of. So far it has done a good job, marginally outperforming the index, with returns of 21.3 per cent.
Again, it uses a full replication strategy.
Vanguard Japan Stock Index
This is one of the few tracker funds in the IMA universe that allows investors to get cheap exposure to Japan.
While Japanese equities have been in a sorry state for going on two decades now, an increasing number of managers have tipped it as a cheap market with improving fundamentals – namely the team behind the Ruffer Investment Company.
For anyone who agrees with them, this $1bn tracker provides direct access to the MSCI Japan NR index with an OCF of 0.3 per cent.
Since its launch in June 2009, the tracker, which uses full replication, has made 34.59 per cent, in a hugely volatile period for markets.
Performance of fund and index since launch
Source: FE Analytics
Again Vanguard Japan Stock Index requires a steep minimum investment, but is available on a number of platforms.
BlackRock CIF Continental European Equity Tracker
There are still big worries over the eurozone, but the Europe ex UK region remains popular with global managers.
The FTSE World Europe ex UK index has already rebounded well since the troubles of 2011 – up 22.23 per cent year-to-date – but there is still speculation that it could rise further.
A cheap way to get exposure to the index is through the BlackRock CIF Continental European Equity Tracker fund, which has an OCF of 0.25 per cent.
Nimish Patel’s £1.4bn portfolio has returned 23.39 per cent over a five-year period, falling short of the index by just over 2 percentage points. No Europe ex UK tracker with a long enough track record has matched it so closely.
BlackRock says the fund intends to implement full replication, but can use transferable securities to give the fund indirect exposure to companies.
This may go some way in explaining why its cumulative tracking error is high over a five-year period – over 10 per cent, according to FE data.
It requires a minimum investment of £1m, but is available on a number of platforms including Fidelity Supermarket, Interactive Investor and Nucleus.
In an FE Trustnet study later this week, we will identify some cheap actively managed funds that you may wish to consider for your ISA this year.
