ETFs, trackers & dividends

armour

Morning all,
I'm starting a SIPP with some "contracted out" money. I'm with Sippdeal and have decided to try to track the FTSE100 with the bulk of it.
I've read that some ETFs and index trackers can do this at low cost but what happens to the dividends that are paid by the constituent companies?
It appears to me that not paying these dividends could be a "hidden charge".

jamesd

If you buy an income form the income is paid to you, perhaps into a cash account associated with the investment one or as a cash balance. If you buy an accumulation form it increases the value of the investment. It's not normally retained by the operator of the investment.

Chargem

armour wrote: »

Morning all,
I'm starting a SIPP with some "contracted out" money. I'm with Sippdeal and have decided to try to track the FTSE100 with the bulk of it.
I've read that some ETFs and index trackers can do this at low cost but what happens to the dividends that are paid by the constituent companies?
It appears to me that not paying these dividends could be a "hidden charge".

When looking at index tracker fund information, the yield they provide in their advertising materials is the dividends from the companies held by the fund.

armour

thanks for your reply Chargem.
I'm a tad confused here.
Here's a standard tracker pension fund which states it dosent pay a dividend.
Could you direct me to an easy to understand tracker fund which pays out Dividends recieved from the shares it has bought. If it just gives you an extra unit or two how do you know you'r not being diddled?


http://www.trustnet.com/Factsheets/Factsheet.aspx?univ=P&fundCode=AIGPT&pagetype=overview

jamesd

Sine it's a FTSE tracker and there is no dividend it's accumulation units. If it was income units and if they were reinvested by buying more units you'd should be able to ask for details of the units purchased from your pension provider to check those against the corresponding dividend distributions from the fund. You can find a range of trackers with both income and accumulation forms in this list.

armour

OK. So the yield is the accumulated dividend from the underlying shares.
Why then is the yield from two FTSE100 trackers so different?
Looking at the trackers you provided jamesd, I notice that the first 'non platform fee' one charges 0.63%
http://www.hl.co.uk/funds/fund-discounts,-prices--and--factsheets/search-results/b/blackrock-balanced-consensus-accumulation
but it is also invested in a bunch of other investments, which charge their own percentage
http://www.hl.co.uk/funds/fund-discounts,-prices--and--factsheets/search-results/b/blackrock-cash-accumulation

armour

I get the distinct impression that I'd be better off buying (at least some of) the shares that make up the index and reinvesting the dividends myself. That way I'd pay 0.5% stamp duty plus dealing charges only.
Am I missing something?/Can someone convince me otherwise?

Linton

armour wrote: »

I get the distinct impression that I'd be better off buying (at least some of) the shares that make up the index and reinvesting the dividends myself. That way I'd pay 0.5% stamp duty plus dealing charges only.
Am I missing something?/Can someone convince me otherwise?

You could put together a portfolio of LSE shares, but then it wouldnt be a tracker. It would be a portfolio of shares, its performance dependent on you chosing the better ones and avoiding the bad ones. Nothing wrong with that, but the main reason for buying a tracker is that it guarantees average performance - it will never be the best but more importantly it will never be the worst. By going for your non-tracker portfolio are your confident that you will not make bad share choices leading to a far larger under performance than the tracker charge %?

Why cant you run your own tracker ? The FTSE 100 is weighted on market capitalisation. The largest company, Shell, is worth £145,000M. The smallest, London Stock Exchange, is worth less than £3000M. So you would need 50 times the money in Shell that you have in LSE. If a minimum viable investment is £500 it works out your total portfolio would need to be around £250,000. Do you have £250,000 to invest? If you did, perhaps investing totally in the FTSE100 would not be the best use of your money.

jamesd

That Blackrock fund mostly holds other Blackrock funds so it's probably getting them at cost price. That shows up in the difference between the annual management charge of 0.60% and the total expense ratio of 0.63%, barely higher even though the TER includes the AMCs of any investments it holds. You can see an example of this effect with the Jupiter Merlin Growth Portfolio which has an AMC of 1.50% but a TER of 2.57% because it holds lots of managed funds from other companies as well as its own. That Jupiter fund is a good example of a fund of funds, in spite of those charges, for people who want to have a fund manager decide which funds to invest in.

armour

Thanks for your replies.
Unfortunately, the contracted out pot is only worth £15K. It's a minor part of my overall pension planning at the moment but, as I expect to become liable for 40% tax this year, I want to invest the excess (up to £5K/year) in this pension.

The reason I moved it is because it has actually lost money in a supposed managed fund.
Upon deeper investigation I found that my poorly performing fund (0.7% charge) was invested in a host of other poorly performing funds (charges varied)...... Each of them bought from the same fund company as the original.
Where is the incentive to do best by the customer here?

Can somebody direct me to an index tracker which actually buys index shares and distributes dividends in a fair transparant way?

jamesd

The Blackrock fund you mentioned earlier is largely one of those, even though it does itt mostly via its own sub-funds. Sub-funds because all of the funds are a part of the same OEIC structure.

HSBC has a tracker that does it with less indirection. The Vanguard funds don't, their initial charges aren't transparent and don't seem to be used exclusively for what they say they are for, though they are quite popular.