While passive funds are often much cheaper than their actively managed counterparts, for investors looking for a steady stream of income, active funds are far more compelling.
Of the 11 funds that track the FTSE 100, only the Santander Stockmarket 100 tracker is yielding more.
The Santander tracker is yielding 4.13 per cent while the FTSE 100 is yielding 3.68 per cent. The average fund that tracks the FTSE 100 has a yield of just 2.4 per cent.
Top-5 highest-yielding FTSE 100 trackers
| Name | Yield (%) |
|---|---|
| FTSE 100 | 3.68 |
| Santander Stockmarket 100 Tracker Growth | 4.13 |
| HSBC FTSE 100 Index | 3.24 |
| L&G UK 100 Index | 2.7 |
| Aviva Investors Blue Chip tracking | 2.6 |
| RBS FTSE 100 tracker | 2.57 |
Source: FE Analytics
There isn’t a single fund that aims to replicate the FTSE All Share that is yielding more than index’s 3.56 per cent. The average FTSE All Share tracker is paying out 2.74 per cent.
Top-five highest-yielding FTSE All Share trackers
| Name | Yield (%) |
|---|---|
| FTSE All Share | 3.56 |
| Scottish Mutual UK All Share | 3.35 |
| HSBC FTSE All Share index | 3.15 |
| Vanguard FTSE UK Equity index | 3.13 |
| Vanguard FTSE UK UK All Share index | 3.12 |
| Liontrust FTSE 100 tracker | 3.11 |
Source: FE Analytics
Charles Stanley Direct’s Rob Morgan (pictured) says the discrepancy likely comes from the fact that tracker funds often take their charges from income rather than from capital, which would reduce their overall yield.
However, he says he was surprised at the extent of the difference for the majority of FTSE 100 and FTSE All Share trackers. "Charges are taken from income rather than from capital so you would expect them to yield less, but I am surprised by the extent," he said.
"I would expect half a percentage point coming off the yield, so I would expect about 3 per cent from a tracker. However, most people who are buying a tracker are likely to be looking for growth rather than income, and if you’re purely focused on cost, a tracker is still the way to go."
Still, Morgan says if the yield is far off that of the underlying index, investors need to understand what causes the discrepancy in the way the fund is run.
"If the fund is buying derivatives rather than actual securities, you might end up with some strange yield figures," he said.
Head of FE Research Rob Gleeson says the difference in yield comes down to the replication strategy the passive fund is utilising, which has a chance of picking up lower-yielding stocks.
He says significantly lower yields are another feather in the cap for actively managed funds, because they are required to pay out more than the index.
"UK Equity Income funds are required to yield 120 per cent of the index, so you’re always going to get a higher yield," he said.
However, there are a few ways investors can get a comparable yield from passive investments.
HSBC FTSE 100 ETF
This exchange traded fund is yielding 3.3 per cent, less than 0.4 percentage points off its FTSE 100 benchmark.
However, it has underperformed over the last one and three years, returning 34.87 per cent over three years, while the FTSE 100 index gained 41.93 per cent.
Performance of fund vs index over 3yrs
Source: FE Analytics
It has tracked the index with an error of 4.62 per cent over the period.
Among its top holdings are its namesake, HSBC, Vodafone and BP. The largest sector weighting is to basic materials followed by consumer products and financials.
The fund has an extremely low total expense ratio (TER) compared with actively managed funds, at 0.35 per cent.
iShares FTSE 100 UCITS ETF
With a yield of 3.51 per cent, the £3.8bn iShares FTSE 100 UCITS ETF is only yielding 0.2 percentage points less than its benchmark.
The fund has performed broadly in line with the FTSE 100 over the last one, three, five and 10 years.
Over the last three years it has gained 39.95 per cent while the index has made 41.93 per cent.
It has ongoing charges of just 0.4 per cent.
DB x-trackers FTSE All Share UCITS ETF
The passive fund is yielding 3.36 per cent, only marginally less than the FTSE All Share.
It has tracked the index with an error of 4.17 per cent over the last three years and has ongoing charges of just 0.4 per cent.
Like the iShares vehicle, the DB x-tracker has performed in line with the FTSE All Share over one, three and five years, gaining 52.18 per cent over the last five years. The All Share made 55.47 per cent, according to FE Analytics.
