The lower cost can make them an attractive alternative, especially in markets that are heavily researched and where the major companies are well known to analysts.
Here are five such low-cost funds that are suitable for inclusion in a portfolio that is built with the aim of achieving long-term investment goals.
Global – Vanguard FTSE Developed World ex UK Equity Index
The Vanguard FTSE Developed World ex UK Equity Index fund gives investors exposure to the world’s largest companies outside the UK.
| Name | Vanguard FTSE Developed World ex UK Equity Index |
|---|---|
| Fund size | £710m |
| Min. investment | via platforms |
| OCF | 0.30% |
| Tracking error (since launch) | 7.11% |
| Yield | 1.69% |
| Crown Rating | 3 crowns |
Source: FE Analytics
Naturally, this list is dominated by blue chip US names such as Apple, Exxon Mobil and General Electric.
These types of companies are also heavily researched, which means it is difficult for a manager to add value through stock selection in markets they dominate.
Nearly 62 per cent of the tracker is invested in North America, followed by 18.4 per cent in Europe ex UK and 10.3 per cent in Japan.
Since launch in June 2009, the fund has beaten the IMA Global sector and tracked the FTSE All World Developed ex UK index with an error of 7.11 per cent.
Performance of fund vs sector and index since launch
Source: FE Analytics
The tracker has a high barrier to entry, requiring a minimum investment of £100,000; however, it is available to retail investors via numerous platforms.
It has ongoing charges of just 0.3 per cent.
UK Equity Income – Vanguard FTSE UK Equity Income Index
Income is a popular theme for many investors, and Vanguard UK Equity Income Index's yield of 4.07 per cent and ongoing charges of just 0.25 per cent make it a good alternative to actively managed funds in this area.
| Name | Vanguard UK Equity Income Index |
|---|---|
| Fund size | £278m |
| Min. investment | via platforms |
| OCF | 0.25% |
| Tracking error (since launch) | 6.44% |
| Yield | 4.07% |
| Crown Rating | 5 crowns |
Source: FE Analytics
The five crown-rated tracker has outperformed the sector by nearly 25 percentage points since launch in June 2009, returning 100.25 per cent.
It tracks the FTSE UK Equity Income Index with an error of 6.44 per cent. The index made 104.01 per cent over the period.
Performance of fund vs sector and index since launch
Source: FE Analytics
The fund is dominated by major UK companies such as GlaxoSmithKline, Vodafone and BP.
It is available through numerous platforms.
North America – Royal London US Tracker
Trackers can be particularly useful in highly researched areas such as the US, where active managers find it notoriously difficult to consistently outperform.
Without adding value, it is difficult to justify an active management fee.
This fund has charges of just 0.24 per cent, allowing investors to access the US growth story by following the market.
| Name | Royal London US tracker |
|---|---|
| Fund size | £1.9bn |
| Min. investment | via platforms |
| OCF | 0.24% |
| Tracking error (since launch) | 3.85% |
| Yield | 3.49% |
| Crown Rating | 3 crowns |
Source: FE Analytics
Since launch in August 2007, this fund has returned 59.79 per cent compared with 68.86 per cent from the FTSE USA index, according to FE Analytics.
It has beaten the IMA North America sector over this time.
Performance of fund vs sector and index since launch
Source: FE Analytics
It has a tracking error of 3.85 per cent and is yielding 3.49 per cent.
Royal London is in the process of rolling out the fund on retail platforms.
North America – Vanguard US Equity Index
Another cheap option for providing access to the US growth story is the £723m Vanguard US Equity Index tracker.
With ongoing charges of 0.2 per cent, it is easily the cheapest fund on this list, and has outperformed the IMA North America sector since launch in June 2009.
| Name | Vanguard US Equity index |
|---|---|
| Fund size | £723m |
| Min. investment | via platforms |
| OCF | 0.20% |
| Tracking error (since launch) | 9.33% |
| Yield | 1.25% |
| Crown Rating | 3 crowns |
Source: FE Analytics
The fund has gained 108.13 per cent over this time compared with 89.25 per cent from the sector.
It tracks the S&P Total Market index, which is not included in FE Analytics. As a point of comparison, the S&P 500, which only lists the largest companies in the US, has made 102.4 per cent since the fund's launch.
Performance of fund vs sector and index since launch
Source: FE Analytics
Because the fund covers the entire US market, it also invests in mid and small cap companies as well as the usual blue chips. Its largest holdings are the likes of Apple, Johnson & Johnson and Google.
It tracks the index with an error of 9.33 per cent.
Emerging markets – BlackRock CIF Emerging Markets Equity Tracker
While emerging markets are less researched than their more developed counterparts, the broad range of countries and industries available in the sector means investors may want to take a stronger view on an individual region.
The BlackRock CIF Emerging Markets Equity Tracker is an option for anyone who wants more general exposure.
It has ongoing charges of just 0.28 per cent.
| Name | BlackRock CIF Emerging Markets Equity tracker |
|---|---|
| Fund size | £379m |
| Min. investment | via platforms |
| OCF | 0.28% |
| Tracking error (since launch) | 2.95% |
| Yield | 2.28% |
| Crown Rating | 3 crowns |
Source: FE Analytics
Since launch in November 2009, it has lagged behind the average IMA Global Emerging Markets fund, returning 20.6 per cent compared with 25.91 per cent from the sector.
The FTSE All World Emerging Markets index has gained 15.57 per cent over the same time.
Performance of fund since launch vs sector and index
Source: FE Analytics
It is yielding 2.27 per cent and tracks the index with an error of 2.25 per cent.
The fund’s largest holdings include Taiwan Semiconductor Manufacturing, which is a staple of many emerging markets funds, China Mobile, and major Brazilian bank Banco Bradesco.