Cheap tracker funds

StinkyMonkey wrote: »

Is cost the only consideration when choosing a tracker (i.e. opting for a HSBC fund) or perhaps other parameters need to be considered?... Is tracking erro important?

Yes it is. Funds use different methods to track an index and the advantage of low charges can be negated by inaccurate tracking.

For the two examples you give H-L show the TER for the HSBC FTSE All Share Idx A Acc they offer as being 0.27% and for L&G UK Index R Acc the TER is 0.55%. At first glance then the HSBC looks the better bet. But then if you look at the returns if anything the L&G has the very slight edge with 33.54% over 5 years against 33.39%. (Note that H-L offer the institutional, not the retail version of the HSBC fund.)

The Fidelity Moneybuilder UK Index attracts a lot of attention with an AMC of just 0.10% but the TER is 0.27% and the return over 5 years as given on the H-L site is slightly worse than both those you mentioned 32.7%. On top of that, if you hold it in an H-L ISA they'll charge you another 0.5% plus VAT because it doesn't pay them trail commission. You can chart funds you're interested in at http://www.h-l.co.uk/funds.

ETFs might be a better bet again with the lowest charges except that you'll have to pay a broker fee to buy them and most often an extra charge if you hold them in an ISA. So will depend on your circumstances and not so suitable for drip feeding small sums.


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StinkyMonkey wrote: »

@Rollinghome,
Thanks for your message. I will not be looking into ETFs because for a regular saver with small monthly amounts, the brocker fees are prohibitive. Neither would I chose any funds that attract an additional fee, the 0.5%+VAT you have mentioned.

I note that you suggest that different trackers use different tracking methods. Is there a website where I can find what method is used by each tracker and a comparison of the different methods?

I'm not sure you'd even be told by the fund managers. Some use full replication, physically holding all the shares, while others will use other instruments to achieve a similar result. I don't think that in itself it really matters much. More important is the outcome. Also important is choosing index you want to track. Most people would choose an FTSE All share tracker but depending on the circumstances you might use one of the others either because you expect it to outperform or because it complements your other holdings.

I agree that the L&G may have a slightly higher return but in the grand scheme of things and given the small monthly amounts invested, would such a difference be more critical than a (significantly) lower TER?

As you can seen from the charts, all the trackers of a particular index (provided the AMC is below 0.5%) have a fairly similar return and are consistently positioned in the tables. I think you have to look at the TER and tracking error in conjunction. The only thing that really matters, assuming the tracking is reasonably consistent, is the net return.

With most unit trusts it's usually cheaper to buy via someone like H-L but that may not be the case with low cost trackers. If you went for the L&G fund for example you might find it as well to buy direct. You could always transfer your holding to H-L at a later date if you wanted to for any reason.

Finally, I have also noted that H-L offer the institutional version of the HSBC All share index tracker. Does this have any practical or other implication for a retail investor whoc would like to buy the fund through the H-L platform?

The main difference should be the cost with the institutional funds being lower.

If you're looking for a single fund solution you might also like to look at Investment Trusts. Many have savings schemes though I don't know the details. ITs have the potential for much better returns than UTs. They are all very different but the big generalist funds like Alliance, Scottish Mortgage, Witan and Foreign & Colonial can hold a whole range of assets including UK and non-UK shares, bonds, property etc, which helps to reduce risk, and unlike UTs they can borrow money if they think gearing will enhance the returns. IT's are "closed end" which means unlike UTs they don't need to buy or sell assets as investors buy and sell units. Because of the more efficient arrangements the management costs are often the same or less than UT trackers. I've never used the savings schemes they run so you'd need to check them out yourself. All about ITs: http://www.theaic.co.uk/

fg22 wrote: »

L&G had the lower TER until recently, around Sept HSBC dropped their charges therefore past performance will not reflect their new lower charges. A fairer comparison would be HSBC institutional units against L&G.

H-L offered the institutional version as until recently it had lower fees than the retail version. I don't think there is now any practical difference between them.

That figures. Looks as if L&G may have slightly lowered their charges fairly recently too, perhaps in response. AMC now 0.40% which was once 0.50%, TER 0.55% from about 0.7%(?). Those two could be the best bets in an H-L ISA as there's no extra charges. The F&C offering has a TER of 0.27% but with an extra 0.5% + VAT for the H-L ISA.

Edit. Just checked. In June L&G had a AMC of 0.50% and TER of 0.52%. So although they've supposedly lowered the AMC the TER has actually risen slightly.

The 250 is the best index as it covers still growing companies where as the largest companies tend to expand more slowly but pay out better dividends. Quite alot of the Ftse100 is commodities though which is good news now

I had the lg all share accumulated fund for many years but I would not suggest you buy that except for the quite high dividend and use it for income maybe.

Otherwise the midcap 250 is better on every time frame, companies are sold as they graduate in size where as the ftse100 will only sell as the share falls in value, so on a basic level it is not realising profit as well

Finally ftse 100 has not grown over the last 10 years but 250 is well up